Parents are often scared to talk to their kids about money.
Some lessons mean admitting mistakes; others signal unattainable goals. But the consequences of not imparting those lessons on your own kids could be more dire than ever. Unlike grandpa, who may have a pension and employer provided health insurance — most children now need to understand much more than basic budgeting. Big brother doesn't have anyone's back anymore.
Kids will need to understand how to save for their own retirement, manage health care costs and even cope with diminished Social Security benefits. Sounds like this is jumping the gun? It's not.
Proper preparation of your children, even at a young age, can start them down the path of a successful financial life.
Talk early and often. Children start learning about money long before their first savings account, job or credit card. Begin the conversation even before they're in school by talking about work and money. Avoiding the subject until your child needs a bank account can make the conversation hasty and confusing.
Everyday activities are teachable moments. A trip to the grocery story is a good time to explain price comparison, value and inflation. An ATM stop offers a chance to explain that money doesn't actually come from a machine. You can discuss both earned income, investment returns and even inheritance. Opening bills is a chance to talk about payment for services, credit card debt and interest rates. Children need to be taught about debt, specifically loans and credit cards. Talk about insurance with teens, especially as they learn to drive or as you're selecting what health care options are available to your family.
Follow a guide. There are online websites and even games that families can use to get the conversation going such as Thegreatpiggybankadventure. Other examples include Feedthepig.org, kids.gov and TheMint.org/kids.
Talk about giving. Children should learn that money doesn't always need to be used for them. It can also provide assistant to others. Don't just write the charitable check. Get the kids involved in the process by asking them to pick and vet charities. Websites like charitynavigator.org and guidestar.org provide information and ratings.
Encourage your kids to work for money. Not all teens have the time to work, but about half of college-bound high school students expect that they will have to foot some of the bill. Sometimes an odd job is just as valuable a learning experience as a steady job.
Start an allowance. Before your kids are able to venture out for their own jobs, even babysitting, teach them the relationship between work and money. You can even develop an incentive or bonus system for excellent cleaning.
Build a budget for things you provide. Take clothing or electronics: you can give them the chance to spend their category budget all at once or learn to save and look for the right item at the right price.
Open a checking and savings account. They will learn about fees, account maintenance and even interest. You can provide an incentive for thrift, offering a match if they put the money into savings, perhaps 25 cents on the dollar. Many banks and credit unions have special savings accounts and credit cards for students.
Teach them about investing and retirement savings. Waiting until that first full-time job to learn about 401(k) plans is a mistake. The sooner they start saving for retirement, the more they'll benefit from compounding returns and good habits.
Teach basic investing. When the balance in a savings account reaches $1,000, show them how to open a custodial investment account. A good initial investment is a broad-based index fund. Teens can go online and research performance and ratings.
Open an IRA or a Roth IRA. What better way to show the importance of retirement savings than to open a retirement account. You can even fund one for your child as long as he or she is earning a paycheck.
What not to do
Don't get frustrated because your kids don't take your advice. Kids need to make some financial mistakes in order to understand the consequences
Don't be a lifeline. A bad purchase or a bounced check is a relatively painless way for a young person to learn better money management skills, but you may need to intervene if they'll damage their credit score. If they get into debt, help them strategize how to pay it off and why.
Don't set their goals. Let kids set their own financial goals, say financial advisers, or they'll never learn the basics and discipline.
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Originally published July 17, 2011
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The views of the authors of these articles do not necessarily represent the views of First Republic Bank.