At Canopy, we think about money, spending it wisely, and planning for your financial future, every day. That’s our job. But we often hear from members and others that one of the most eye-opening deficiencies they discovered as they were thrust into adulthood was that they were thoroughly unprepared to deal with money. They never learned how to set a budget, save and invest, how to fill out a tax return, choose the best loan or credit card, apply for a mortgage or find trustworthy financial advice.
While it’s important for kids to start learning about money when they’re young, it’s even more crucial as they get older and begin dipping their toes in the workforce, and inevitably setting their eyes on cars, musical instruments, gaming gear, and travel experiences that are going to cost way more than a few dollars. For teens, gaining knowledge about financial topics, such as earning, borrowing, lending, donating and investing can provide lessons that will serve them for the rest of their lives. Hopefully early learning can help many avoid painful lessons. While the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 made it harder for credit card companies to exploit students, there are still plenty of opportunities for kids to make mistakes when it comes to money.
Start the Conversation Early.
The money conversation should begin as soon as children can understand it. Gradually parents should begin to give their kids some control over their money by the time they reach their teens. With backing from the “family bank”, their mistakes may have lower consequences, but the lessons can be just as meaningful.
Simply talking about money on a regular basis with your kids can help them feel more comfortable with financial concepts and the questions they will inevitably have.
Pay Your Kids for the Work They Do.
Whether you’re teen has a part time job, does chores for neighbors like lawn care or babysitting, or just helps around the house with dishes, laundry, and keeping their rooms clean, making sure they earn money for the value they’re providing not only helps them appreciate what they earn more, but also to recognize the value of their time and effort — a lesson that can pay off (literally) over and over again. You can create a set allowance to be paid each week or put a value on each of the duties or chores that they do and run a total on “payday”. Helping your young people make the connection between work and pay can help you avoid becoming the family ATM every time a need or want arises.
Introduce Your Kids to Their First Savings Account
Once again this is something you can begin to do when your kids are young. Take them to the bank when you’re there on an errand or show them how the ATM works on the way to getting ice cream. Consider creating a savings account for your child when they start school then sit with them and figure out how much they can expect to earn for helping around the house and how much of that they’d like to save. They may want to set a goal to buy themselves something they’ve wanted or to spend on a family vacation. Help them track their progress each month and consider making matching deposits to help them reach their goals.
As your children get older, they may opt to open a checking account with a debit card they can use to pay for fuel, pizza after soccer practice, and other small luxuries. This will also make it easier for you to transfer money into their account in an emergency.
For recent high school grads and those moving on to college, it might be time to consider a credit card to handle emergencies or thoughtfully planned purchases.
Borrowing Money and Paying Off Debt
Learning how to handle debt is an essential financial skill that kids can learn early. When your child needs money for something immediate, consider making them a small loan that can be repaid on a weekly basis or deducted from their regular allowance.
Eventually your child is going to want money for something much more costly, like a vehicle, a new laptop, or a summer study abroad trip. If you can afford to make the loan yourself, consider building in a small interest charge into the repayment plan. For example, if you loan $1,000 with repayment at $100 per month for the next ten months, consider extending the payment schedule by an additional month so they repay a total of $1,100. They’ll learn that borrowing comes with a cost and prompt repayment can help them avoid higher costs and potential penalties. Sit down with your child and use one of Canopy’s online loan calculators to show a real-world example of what an actual loan might cost over the length of its term.
Introduce Your Child to Investing for the Future and the Power of Compound Interest
When your child accumulates some savings or gets gifts of cash, perhaps at graduation, it may be a good time to talk to them about investing. Encourage them to think about setting long-term goals and investing regularly over time. You may be able to set up a low-minimum brokerage account for them and convince them to add to it over time.
There is no better incentive for financial rectitude than watching your savings earn for you. One day, that account and the behavior it incentivizes may become the foundation for the financial independence you want them to achieve.