One of the most important lessons parents can hand down to their children is how to manage money. These skills help them become adults who can handle their own finances, make smart money decisions, and go on to teach their own children about the value of a dollar.
Before you can teach your children about money, however, you need to examine your own feelings on the subject. Do you plan your purchases and save toward them, or buy everything on credit and worry about it later? Have you thought about how you are going to afford retirement, and have contingency plans for unforeseen events, or do you careen from paycheck to paycheck without a solid plan? Does your family have a budget and open discussions about money, so your children can see what goes into making a decision? Even the youngest children are aware of the power of money to be able to satisfy their needs and wants.
Unfortunately, many parents do not have a good handle on their money situation, or don’t believe that it is necessary to pass these skills on to their children. When it comes time to select a college, there is no foundation upon which to balance emotional and financial considerations. All too often, an emotional decision is made that throws the family and the student into financial chaos. Here are five lessons you can use to help make your child smarter about money:
1. Budgeting: People who use debt as a way of paying for everyday or exceptional expenses often find themselves in a downward spiral as interest builds on the purchases they have made. The amount due finally becomes so large that it is impossible to make the monthly payments, and additional debt has to be acquired to try to stay above water. Break this cycle of debt by teaching your children how to budget early. Show them what money is and how to use it. Give your child a small weekly allowance and then demonstrate how part of that money should go towards savings while some of it can be used for current purchases. This ability should grow as the child ages and the needs become larger.
2. Earning: There should be a clear connection between the willingness to earn money and the ability to make purchases. Don’t just buy everything for your child. Work together to discover ways the child can earn money to accomplish a goal if there is some need or desire. These activities should be in addition to traditional chores the child is expected to complete as a member of the household.
3. Debt: Too many young people do not have an understanding of how to use debt to achieve goals. They use credit cards, personal loans, and student loans to pay for everyday expenses and then start in on life with a heavy financial burden that may take years to overcome. Talk about the meaning of borrowing and the effects of interest on purchase decisions. If your child wants to make a larger purchase when young, you might even consider loaning him or her the money, with regular payments and interest due as an important lesson.
4. Needs vs. Wants: There has to be a balance between spending money for items that are needed, such as a college education, and things that are wanted, such as an expensive car. If your child learns to spend money every time he or she simply “wants” something, that attitude can be a negative life lesson.
5. Get Your Money’s Worth from College: Paying for college is one of the biggest and most important financial lessons you can teach your child, so it should not be put off until the senior year. Have discussions with your child all through the school years about college costs, financial aid, student loans, and look ahead to make sure that the income potential exceeds the investment requirements.
While some students think only about going to the biggest and most expensive colleges, you can provide skills to help your child make a decision that is both emotionally and economically sound.