For most teenagers, spending money seems to come naturally. But that doesn't mean they know how to manage it. In fact, the JumpStart Coalition for Personal Financial Literacy recently found that only 10 percent of 12th-graders could satisfactorily answer questions about personal finance. Some couldn't balance a checkbook.
Yet many high school students have, and regularly use, credit cards - with little or no understanding of how interest rates, skipped payments or continual high balances can impact a person's financial future. So whether you've already begun the process of instilling sound money management in your teen or you're searching for ways to begin, you may find the following tips helpful.
Lead by example. Take a look in the mirror. If, for instance, you budget effectively, invest wisely, pay down debt and donate to charity, most likely your children will learn by example. Financial responsibility is one area where a parent's actions definitely speak louder than words.
Talk about money management. As soon as your child begins to earn money, it is important that he or she thinks about how to manage the income. A budget may seem annoying and a little extreme - but a basic plan may set the tone for jumpstarting your teen's financial future while still leaving money left to buys the things that will help him or her enjoy today. Your teenager's desire for a new video game, phone, computer or car can work to your advantage.
At this stage, you can begin to have periodic family financial discussions. This doesn't necessarily mean that your teenager needs to know your total income or the amount of your home mortgage. But you can certainly begin to familiarize your teenager with the family budget, financial challenges you may be facing, some of the family's longer-term goals and priorities, and perhaps how he or she can help you make progress toward these goals.
Encourage your child to start saving early. Even if in the beginning your teenager is more into buying new clothes for the school dance rather than putting away money for medical school, saving as early as possible for whatever the goal may be is key. And no matter the size of the paycheck, help your child recognize the importance of always saving a portion of what she earns. Practicing good savings habits early can result in developing wise money management skills that can last a lifetime. Your financial advisor can advise you and your teen on a variety of investment accounts designed for saving money: savings accounts, Certificates of Deposit (CDs), mutual funds and money market accounts are just some of the options.
Stress the importance of establishing responsible credit. There are several ways for a teenager to establish responsible credit - by opening a checking account, using their savings to secure a loan or getting a secured credit card. If your older teen (or college-bound student) wants a credit card, you might seize the opportunity to have a serious talk or two about spending. In general, teens with credit cards are less price-conscious and often spend more than they should. While credit cards are a very common and popular way to help a teenager establish a credit history, when misused the cards can also cost a lot of money. Paying credit card bills late, not paying off balances in full each month and incurring late payment fees are shortcuts for teens getting in over their heads.
Explain credit scores. Make sure your teenager understands that once anyone has created a bad credit history, it can take a long time to recover. A bad credit score can keep your teen from getting a job after college or a mortgage on a home. In all fairness, your teenage son or daughter may not even know what a credit score is. Simply put, a credit score is a snapshot of a person's credit risk at a particular point in his or her credit history. The score helps a lender determine how likely you are to repay your debt on time. For teens with no credit history, no score can be computed.
You can help your teenager understand that one of the keys to qualifying for the loan he or she will want someday at a competitive rate is a strong credit score. Even beyond being a key indicator of whether or not an applicant can qualify for a mortgage or line of credit, credit scores are used in other ways that affect people's lives. For instance, it's been reported in The Wall Street Journal that one in six companies use credit scores before extending a job offer.*
This article was written by Wells Fargo Advisors and provided courtesy of Carolyn Castleberry, Financial Advisor in Norfolk, Virginia at 757-628-8938. For more information, visit www.carolyncastleberry.com.
*Source: March 11, 2009, The Wall Street Journal, "One in Six Employers Looking at Your Credit Report, Study Finds."