As parents, are you actively teaching your children how to handle money, or is it more of a “do as I say, not as I do” type of situation? With intent or not, you are actively role modeling examples of money behavior for your children. Do you and your partner talk honestly and calmly about money issues, is there a financial plan in place, are you putting money aside for major expenditures, or is it more a “fly by the seat of your pants” approach?
The odds are that if you do well with money your children will, too. Unfortunately, the opposite is also true in that children can learn reckless spending habits from their parents which will affect their adult financial lives for many years to come. Nowhere does the need to understand money management come into play more than in paying for college and using credit. Without a solid financial plan in place to save and pay for college out of the family’s available cash reserves, many families turn to student loans, credit cards and borrowing to finance the cost of an education. The problem can be made even worse if there is no attempt to maximize financial aid or to find college scholarships.
Once the borrowing begins, the total effect on family finances snowballs into a huge financial crunch. If the family is already living from paycheck to paycheck, there is no flexibility to repay any loans or pay off credit card balances. Minimum payments are made, or even worse they are missed, which winds up in late fees and penalties being added on to the existing balance. The bad credit history makes it nearly impossible to get good rates on any other type of credit, so the problem continues to be compounded.
A student who graduates from college with a high level of student loans or credit card balances will find it very difficult to get a good start on their adult family life. Here are some things parents can do to avoid these problems by teaching their children how to handle money:
• Lead by example: The best way to teach your children how to handle money is to handle money well yourself. Talk to them about what you are doing to earn money, pay for household expenses, and save for the future. If you are not doing well yourself, make that a learning experience for the entire family as you pull together to pull yourselves out of debt.
• Demonstrate credit: Don’t just give everything to your children. If there is something your child wants to purchase, you can provide a valuable life lesson by offering to make a loan. Do it right by putting the agreement in writing, and be sure to include interest. If your child does not make payments, add on the penalties or ultimately reclaim the item in question.
• Explain borrowing: Your children might see that you live in a roomy house, drive nice cars, or buy beautiful furniture, but they really have no idea how all that stuff shows up at your doorstep. They might think you just sign a piece of paper, pull out a plastic card, or hit a few things on your phone, but don’t know that you have just committed yourself to making “x” amount of payments for a certain period of time. Don’t take a casual approach to your purchases – show them what you are doing, and how payments get made.
Your children should be at least as good as you are at handling money, and hopefully better with some directed teaching activities. Make time to talk to your children about money, credit, borrowing, interest and the whole spectrum of money messages. Provide lessons about getting good value for your money, so that they will have a vested interest in finding a college that your family can afford. Once they head out the door to their freshman year, you want them to have the financial skills they will need to make wise financial choices throughout their college years and on into their adult lives.