Credit scores, debit cards, salaries, interest rates, budgets. Ugh. Who wants to talk about this stuff? It turns out, your kids do. In a 2015 Junior Achievement survey, 84% of teens said they look to their parents for money management advice. These are the facts of life your teens want you to discuss, and this is your opportunity to help them build a strong financial foundation.
So, where do you begin and what should you cover? We’ve broken The Money Talk into 10 important conversations below. Plan to cover each of these with your teen before he or she graduates from high school, and you can both feel more confident about creating a healthy financial future.
1. Wants vs. needs. Do you know the difference? Shelter, food, and clothing are needs. Cable TV, dining out, and designer sneakers are wants. Easy. But what about less-obvious categories, like technology?
My husband and I had a lively discussion with our 15-year-old son on this topic. We debated the wants and needs of cellphones, laptops, and Internet access. What is a need when it comes to college research, contacting future employers, watching YouTube? The conversation resulted in a variety of budget options and solutions — including a flip phone. (I’m pretty sure I saw him shudder when that last one was mentioned.)
2. Banking basics: Checking and savings accounts. Most money management lessons should begin with these two basic accounts. Talk to your teen about the purpose of each. Discuss interest rates, minimum balances, overdraft consequences, and ATM fees.
Teach your child how to write a check. In an age in which financial mobile apps and online banking access are growing in popularity, it is still important to master the basics.
Speaking of mobile banking, work together to understand your bank’s mobile app. Review its features, deposit a check remotely, make a payment, and discuss security options.
3. The difference between credit and debit cards. This is where you get to use the classic parent line, “Money doesn’t grow on trees.” Be clear with your child that credit cards are not free money. Explain that, ideally, you should be able to pay off your credit card in full each month. Go over the downside of making minimum monthly payments. Compare interest rates on various credit cards on the market.
Emphasize the importance of keeping credit card information secure and how to do so. Talk about what to do if the card is ever lost or stolen.
4. Identity protection. An estimated 17.6 million Americans (about 7%) aged 16 and over were victims of identity theft in 2014, according to a report from the Bureau of Justice Statistics. The vast majority of victims (86%) experienced misuse of an existing credit card or bank account. To help prevent this from happening to your child, explain the importance of protecting Social Security numbers, passwords, and account numbers.
Together, review social media privacy settings and discuss what kinds of information (birthday, address, phone number) should stay off the Internet. Encourage a change of passwords every month, and use different passwords for different accounts.
Examine your child’s credit report together at least once a year, and encourage him or her to check their bank balances regularly.
“If they are using a debit card, remind them to shield their pin when using it,” advised Maria Porto, a financial educator with Hanscom Federal Credit Union. “Explain that if someone is standing right behind you, possibly to get your pin number, don’t be afraid to tell that person to back up.”
5. What jobs pay. Income shouldn’t be a mystery to our children. Knowing what positions pay can help them to make better decisions about their education and career paths. If you are not comfortable discussing your income, take time to research the incomes of various occupations that interest your son or daughter. Start with websites such as salary.com and glassdoor.com.
6. How to make a budget. If you are comfortable, share your household budget. If you don’t want to share your personal budget, help your teen to create a mock budget using a possible future income. Do an online search for a budget template to get started.
Take time to explain the expenses that you find to be most challenging and strategies you use to manage your money.
7. Compound interest. Simply put, compound interest is interest that is added to a deposit or loan over a set period of time. With each new passing of that specified amount of time, interest is calculated using the previous balance with its accrued interest. In short, interest begets interest, meaning that a small savings today can grow into something bigger over time.
Underlining this concept will help your teen understand the importance of saving money early in life and — hopefully — developing a lifelong dedication to savings. The U.S. Securities and Exchange Commission has an online Compound Interest Calculator at investor.gov. This calculator is a handy tool when explaining compound interest. You can enter various savings amounts, interest rates, and time frames — and then watch the money grow.
8. Building credit. It’s an important lesson to teach all young people: Maintaining a good credit score and report will save you money throughout your life. The best interest rates charged by lenders go to those with the best credit. Additionally, future employers or landlords may use your credit worthiness in making a decision about you.
Teach your child strategies for building a strong credit profile. These include keeping a low balance on credit cards and paying bills on time.
9. The price of debt. Remember that lesson about compound interest? Well, it holds true for debt as well as savings. According to a recent report by U.S. News and World Report, the average student loan bill for 2014 college graduates was $28,077. To pay that back over 10 years at 5% interest, a student will have to fork over $300 a month. That can put a noticeable dent in a monthly budget.
10. How to set financial goals. This is one of the fun financial lessons to share with your child. By making financial goals, both short- and long-term, plans can be created to reach those goals. Is a new phone on the wish list? How much will it cost and how many months do you have to save for it? By making a realistic plan and sticking to it, you can reach your goal.
Explain that setting financial goals is a skill your teen will use throughout life to save for things like a new car, a vacation, the holidays and — most importantly — retirement.
If you hesitate to have The Money Talk because you lack confidence in your own money management skills, take this opportunity to learn with your teen. The Internet is filled with articles and videos to get you started, and most banks and credit unions provide advice at no charge — all you have to do is ask.