Teaching Kids to be Financially Fit
The Early Years
You can start the conversation about money well before your kids are making financial decisions of their own. Here are some tips when talking with preteens about being responsible with money.
- Practice what you preach. Kids tend to pay more attention to what we do than what we say. Keep your own financial affairs in order – if they see you being wasteful with cash or credit cards, they’ll think it’s OK to do the same.
- Show them where money comes from. For most of us, money is earned from the work we do. Give your kids an overview of how the household finances work. Even if they’re too young to appreciate the details, they might benefit from a big-picture perspective and why spending choices need to be made.
- Talk with them about their own money. It’s not uncommon for kids to receive cash or checks for birthdays or holidays. Talk with them about their choices – spending it, saving it, giving it to charity – and your own experiences with each. If you want to teach them the rewards of saving or giving, consider matching whatever they save or give to reward behavior you feel is important.
- Let them spend. Remember, the goal is to teach them responsible decision-making – and to let them make mistakes when the risks are low. Being too frugal and making them save all of their cash can lead to as many issues with future decision-making as being too reckless.
The Teenage Years
Even busy teenagers often have time for babysitting or a summer job. Work of any kind can be a valuable opportunity to teach teenagers about money.
- Talk about taxes. That first paycheck is an excellent time to discuss taxes. Walk them through why FICA and Social Security are withheld, and how they may get some of that income back when filing taxes. Your Baird Financial Advisor can help you with this conversation.
- Teach them to pay themselves first. It’s easy to think of any money left over after bills as spending money, which often leaves nothing for savings. A simple rule is to pay yourself first by putting away the first 10% of every check.
- Introduce them to investing. As teenagers start to accumulate savings, now might be a good time to talk about basic investing concepts or even buy shares of a stock or mutual fund. Again, your Baird Financial Advisor could be a good resource here.
The College Years
The college years offer many opportunities to talk about spending and saving choices that can have a significant effect on your student’s future financial well-being.
- Teach them about budgeting. College is the first time many late-teens will make important financial decisions on their own. The ability to establish a budget – and stick to it – is critical. Keeping spending money separate from savings is a good first step.
- Explain the implications of their education decisions. Discuss the choices students might need to make, such as where they want to go to school, should they work during the school year or if they should live on campus or at home. Make sure they understand the implications of student loan debt, both on a monthly basis and over the long term.
- Teach them how to use credit cards. While having a credit card – and using it wisely – can help your teen build credit, the temptation will be there to treat a credit line as free money. Make sure you’re monitoring the account and willing to shut it down if it’s not managed properly.
The Working Years
It’s time for the kids to put to use all the financial lessons you shared with them. Even though they may be out on their own, you still have a role to play in guiding them.
- Explain how credit scores and revolving debt work. At this stage, your adult children will likely be making their own financial choices, like taking out an auto loan or saving for a down payment on a house. Have a conversation about their credit score, how it affects future costs of borrowing and the impact of defaulting on debt. Your Baird Financial Advisor could be a good resource for building their credit record.
- Review with them their employer benefits. With that first job comes important financial choices related to insurance, 401(k) or 403(b) retirement plans and budgeting. You can use this opportunity to reinforce the message of “paying yourself first.”
- Teach them the value of saving early. The idea of putting away money when you’re just starting out might seem like a pipe dream, buy don’t underestimate the power of compounding. Saving even $50 per month can be a positive experience as they watch their money grow over their lifetimes.
Remember, it’s never too late to offer kids your own guidance and experience as they learn to make their own financial decisions. You – and they – might find it helpful to have them talk to your Baird Financial Advisor, who can make a few recommendations based on their stage of life. Not a Baird client? Find a Financial Advisor.
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