As a CERTIFIED FINANCIAL PLANNER™ professional, I work closely with my clients to help them achieve their finance goals and throughout that journey, get to know them on a personal level. I was recently speaking with one of my clients about his child’s first experience living on her own, and how after a few months away from home, she was having a difficult time balancing all of her new responsibilities. My client reflected on how he learned the hard way about managing his personal finance habits, and how he didn’t want his children to have to learn the same way.
As a parent, it’s important to offer advice to your children before they leave home for the first time. Along with the talks about personal responsibility and working hard at their studies, it‘s crucial to talk about developing good personal finance habits as well.
Below are three key lessons to teach them that are fundamental to a successful financial future:
Create (and follow) a Budget
Since this is probably the first time they have been away from their primary source of income (Mom & Dad) in their lifetime, you’ll need to outline what they will be responsible for paying for and what you are willing to pay for. Hopefully they already have a bank account and have a basic understanding of how it works. Before summer comes to an end, talk to your child about how much money they have in their account – and if/when you might be willing to add more – will lay the groundwork of a basic budget for them to follow. For example, if you’ll give them $100 a month, make sure they realize that means around $25 per week in spending money.
To better help them develop good money habits, you are probably going to need to say ‘no’ to your child’s spending needs to help them understand the importance of monitoring cash flow. As the saying goes, ‘money doesn’t grow on trees.’ While this may be difficult for a lot of parents, it is essential to set the ground rules sooner rather than later to help them land on their own two feet financially.
Building Credit and Using Credit Cards
If your child is like most kids heading to school this Fall, they are likely taking out some loans to help pay for their college. Make sure they understand the true cost of their education by showing your child the cost of the loan in addition to the interest payments throughout the life of the loan. Most college students have heard of the student loan debt crisis, but make sure they know what their personal obligation will be in terms of how much money they will owe down the road and making these payments on time to maintain good credit.
Speaking of credit, college-aged students are often solicited for credits cards, so if your child doesn’t have one already, assume that they will be asking you about signing up for one soon. To ensure they don’t get into credit card debt at an early age, talk to them about how a credit card works – if they cannot afford to make the payments now, the number will only increase with interest rates. If they do decide to get a credit card, teach them to track the credit card like a debit card and to not purchase items they can’t afford.
Prepare for the Unexpected
With your child away at school, you can’t protect them from everything, so provide them with a few financial life lessons. To help them avoid poor financial choices, make sure they are aware of the consequences of getting behind on payments, spending too much money on non-important items and identity theft. If you’ve experienced any of this, it can help to share personal stories from when you went to school.
While you want to prevent your child from any unpleasant experiences in college, don’t forget to tell them about all the good things that happen when you spread your wings – your first meaningful job, living on your own for the first time and how you survived financially through college.
College can be, and hopefully will be, a wonderful experience. It is a chance for your child to start acting like an adult both socially and financially. By giving them the tools and guidance they need to build good personal finance habits, you will ensure they are better equipped to protect themselves financially.
For additional guidance on setting your child up for financial success before they head off to college, talk to a CERTIFIED FINANCIAL PLANNER™ professional.