Prepping kids for success in the real world should start in advance of the college-application process.
Graduating from college tends to bring the last snip of mom and dad’s purse strings; grads enter the real world of full-time jobs, rent, taxes, credit cards and,for most, student loans.
To help make the transition easier, parents should use practical, real-life examples to guide their high-school aged teens to financial independence.
“One of the best steps is to teach children about general money management, savings, and budgeting at a very young age so that when they’re interested in credit, there’s a strong foundation,” says Laura Levine, president and CEO at Jump$tart Coalition.
Most schools do not offer money or personal finance classes, so parents’ first step is to gauge how much of an understanding their kids have about finances. As a general rule, “someone’s not ready to borrow until they know how to save,” says Laura Fisher, executive director at ABA Education Foundation. Hands-on experience can be valuable for teens. “The best time for a teen to learn is when they have the safety net of their parents. Finance isn’t intuitive, and parents shouldn’t be afraid to be too basic.”
Parents can use their finances as a teaching tool provided there’s an element of trust. “Your mistakes and successes are great teaching opportunities, and the best time to learn is before teens have trouble and not after,” says Rod Griffin, director of consumer education at Experian.
For more private parents, there are online simulations that can show what financial statements and bills looks like, and other important finance skills.
Teaching Sound Financial-Making Skills
Once a teen understands the value of savings, experts recommend starting conversations about budgeting followed by lessons in loans and interest. “If a child is engaging with you and asking questions, then they’re ready to move onto the next level,” says Jason Alderman, senior director at Visa.
Parents should show their teen the economics of a purchasing decision. At a grocery store, for example, Leslie Linfield, executive director and founder of the Institute for Financial Literacy, suggests parents discuss why they choose one item over another, how to read price tags and calculate discounts.
When using a credit card, be sure to show kids the implications of spending and how the credit process works. “Show them the bill so they can see the charges,” says Linfield. “Explain that you have two choices—to pay off the bill or not—and explain the repercussions of not paying the bill, like finance charges and the affect on your credit report.”
Also detail to kids about loans for homes and cars and how long it takes to save for these big-ticket purchases.
Parents should walk a child through interest calculations using websites to calculate loan payments to show the interest charged on credit cards and loans, and the time needed to pay down debt. “This way, a child can begin to decide whether paying for something with a credit card or loan is really the best option because of the interest,” Linfield says.
Before Getting Behind the Wheel
When a teen is old enough to drive, experts suggests talking about how to buy a car and the ongoing expenses—saving for a down payment, new versus used, how loans work, annual taxes, and insurance—to give a child a complete picture of the financial obligations of car ownership. “Regardless of whether your child is ready to handle a car loan, you can still talk to them about this,” Levine says.
Parents can build on this conversation and create real-world experience. “The easiest way to learn about credit is through a car loan,” says Griffin. “If you borrow money, you have to pay it back even if a family member made the loan. A car loan with a bank might be a good way for a teen to establish credit and learn how to repay debt.”
Although not for everyone, some parents may choose to lend their child money. “As a parent, you have to be disciplined enough to collect on the loan as if you’re a lending institution,” Levine says. “If you’re not disciplined, you might do more harm than good.”
Credit Cards & Kids
Despite what teens may claim, credit cards are not a rite of passage. “Parents should be honest with themselves about whether their child is ready for this responsibility,” says Alderman.
Parents must co-sign on credit cards for a child who’s under 18, and, as part of the Credit CARD Act, consumers between 18 and 21 years old need a co-signer on their credit cards unless they have an independent means to repay the loan. “Parents can co-sign on a credit card to help a child establish a credit history, but parents are on the hook for debt and their credit,” says Fisher.
Regardless of whether a parent decides to give their teen a credit card, Fisher suggests using this opportunity to teach teens habits like organization skills, knowing when bills are due, and paying bills on time.
When a teen is ready for a credit card, experts recommend parents help choose the credit card. “We want to teach children to pick the best option when it’s time to get credit,” says Linfield. “There isn’t one card that works best for all of us. It’s important for all consumers to understand that there are differences, and that it’s important to check them out.”
If a parent gives a teen a credit card, Alderman suggests parents monitor their teen by sitting with them weekly in front of a computer to review purchases and talk through the statement. If there are late fees, parents should talk about solutions and stay involved to know how their teen is using the credit card, he adds.
As an alternative, many parents ask whether prepaid debit cards help to prepare their children for managing credit. “They can be good tools, but they don’t prepare you for credit because you’re spending your own money and not making any payments,” Levine says.
Griffin encourages parents to share with teens their credit report or a sample credit report from websites like Experian.com. Credit reports include payment histories used by lenders to help make lending decisions. “Credit is a good financial tool, but debt can drag you down,” he says.
Experts agree that teens who understand credit and loans will be better prepared for adult challenges. “If you convey to your child that what you do now will affect their future, it will make lenders want to lend to you at a low rate,” Levine says. “Conversely, if you mismanage your early credit, that history will stay with you and affect whether you can borrow and the rate you can borrow at.”
“If we teach our children now, we’re boosting their personal finance immune system and they’ll be far less likely to catch a financial cold and have significant amounts of debt to dig themselves out of,” says Alderman.