Teach Them Early: Financial Literacy for Young People

Do you remember the first time you had to balance a checkbook or apply for a credit card? Were you confident in what you were doing, or did you feel like you were setting foot on an alien planet for the first time? In school, the topic of financial literacy is often neglected, even though it is so critical to everyday adult life. Parents can help prepare their children – especially as children near the end of high school and face heading off to college or living on their own for the first time – by giving them an education in financial literacy. Here are some tips parents can use to help prepare their kids for the world of money management that awaits:

  • Use your funds wisely – There are some things that are wise to spend money on and some that are not beneficial. Teach your children a healthy respect for money management and how to use funds wisely. Explain that multiple trips to the ATM for small amounts with withdrawal charges will dwindle their balance quickly. Many kids learn the hard way that overdraft fees are painful! Help them to plan ahead.
  • Finding a part-time job that fits with their school schedule will go a long way in preparing your children for the future. Understanding a paycheck, paying taxes, explaining Social Security and Medicare withholdings and filing tax returns are all important learning experiences – not to mention the responsibility of being on time for work and doing a good job.
  • Use credit cards to build credit, not debt – Teach your children the right way to build their credit scores without getting buried under a mountain of debt. Encourage them to get low interest credit cards, make a small, necessary purchase and pay it off each month. Have them set aside money to pay the card off at the end of the month so their money doesn’t “evaporate” before the credit card bill comes. Go through the statement with them and explain that although the company allows you to pay less than your balance, it is important to pay that balance to avoid finance charges.
  • Take financial responsibility – One of the best ways to show kids how to budget is to allow them to actually do it prior to being out on their own. If your kids receive an allowance or money from a job, show them how to budget and help guide their decisions, but let them make mistakes, too. It’s better to make a spending mistake now when the consequences won’t be dire, like not being able to pay for rent or food.
  • Save on car expenses – Not only will driving carefully save your life, it will also save you money. Kids need to learn that obeying the rules of the road will pay off with more than good health. Car insurance for young people tends to be very expensive, so any discounts they can get will be helpful. One of the discounts that is in their control is a safe driver discount. Another is a good student discount. Vehicle maintenance is another place where they can save money. Spending a little money now on car maintenance can save a lot of money down the road in costly vehicle repairs. It will improve the longevity of the car so you won’t need to replace it as frequently.
  • Practice goal setting – Most people work better with a concrete goal that they are working toward. Teach your children how to set financial goals for themselves and measure if they have accomplished those goals. If they didn’t meet a goal, assess where they went wrong and start over with the next goal.
  • Introduce your financial advisor – Especially when kids are high school seniors, it’s a good idea to have them talk to your financial advisor who can explain finances in a different way than you as a parent can. As we know, often kids listen to other people more than they do their parents. In my experience, kids are often very interested in learning about finances. A third party might be just the kind of influence your children need when it comes to learning about money.

There are dozens of other ways to teach your kids financial responsibility, but by starting with these simple steps, you can avoid overwhelming them and yourself. Remember, financial literacy is a process. Start now to see the greatest results later when your children are faced with making life changing financial decisions.

Wood Smith Advisors, a Registered Investment Advisor (RIA), is a fee-only financial services firm that partners with its clients to simplify their financial lives. We focus on women, entrepreneurs and individuals with complex financial situations, providing objective and competent advice, education and services to help them develop and build their businesses and reach their financial goals. We can be reached by clicking here.

“Finance Made Simple” blog posts are intended for educational purposes and not for specific advice.  Each person’s situation is different.  Consult your financial advisor for advice relating to topics discussed.

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