Teaching Kids Financial Responsibility

Teaching kids about money and financial literacy is an ongoing process and it is as significant as teaching kids about general education and other life disciplines. Grasping the significance and value of money at an early age will help kids to realise the importance of being financially responsible and respect money, thus helping them navigate their life more smoothly in financial terms. Today, I will discuss some simple steps you can take to make your kids financially responsible in later years.

Understanding Why Money Is Important – The first important thing you can do to is to make kids understand what money is and why it is important to be responsible with it. Explain what money can do; for example, it helps to live a good life, support family and friends, and it helps to support those who are in need and their favourite charities.

Start Early – Children are able to recognise and show interest in coins when they are 4+ years old. Grab this opportunity; when they start showing interest, help them identify different types of coins and bills. When you go for groceries and money exchanging deals, start letting your kids interact with merchants. This will teach interactions with others in general and in terms of money.

Action is Louder than Words – Talking nice things about money is not going to do anything unless you show your kids that you do what you say – and you believe in what you do. Don’t just tell them to stop spending wastefully; set examples by doing the same. Don’t just tell them to invest for the future; do the same and show them how you are doing it regularly in your mutual fund or investment accounts.

Be Careful with Allowance – Do not pay kids an allowance without giving them proper guidance towards how to spend it. Break down their allowance into smaller parts, such as 10% should go to the piggy bank, 20% should go to science magazines, and so on. It is recommended not to pay kids for regular house chores that they would normally do. They can get paid for special projects for which you would normally hire outside people such as mowing the lawn, cleaning the backyard, etc. – if they can complete it successfully.

Bank Accounts and Credit Cards – Bank accounts and credit cards are a part of daily living in the 21^st century and kids should be taught about it once they are 7 – 10 years of age. Explain to them how banks and credit cards work, how and why credit cards charge interest, what to do to avoid paying interest, and so on. Open savings accounts for them, give them credit cards (with lower limits and supervision over how they use it), and walk them through towards becoming a financially responsible adult.

The Importance of Saving Money Early – Once kids start earning, teach them the beauty of saving money. Encourage them to save 15 – 20% regularly and continuously as they enter adulthood. Saving is a virtue that needs to be practised from an early age. If kids can make saving regularly a permanent habit, they will be able to reach financial goals much earlier and will live a happy life.

Learning to Spend Less – If there is one financial tip that is considered the number one tip of all time this has to be it: spending less than you earn. Teach kids to understand this concept and tell them that if they can follow it religiously, they will be wealthy one day.

Learning to Appreciate What We Have – We are privileged to live in one of the wealthiest countries on earth where abundance is everywhere, including riches. Many other nations are not as privileged as we are. Teach kids to appreciate and to become grateful for what we have and show them the joy of giving and sharing.

Keep in mind that “children do what they see.” Parents and adults can be role models by taking sound financial steps. The onus is on you to secure your kids’ financial future by guiding their financial journey through a solid financial roadmap from their early days.

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Credit Cards and Kids

We are living in the age of the Internet and high-tech electronic payment systems – an age in which you don’t need to carry physical money to pay for expenses. Denying the use of credit cards for kids would be like denying them living in the 21^st century. These days, credit cards have become a common daily necessity like cell phones and drivers’ licenses. Credit card companies know that teenagers are a good segment of their target market and they are campaigning fiercely to grab their market share. Leaving kids unaware of credit cards would make them fall into the credit card debt trap and will make their whole life miserable in later years. Teaching kids how to handle credit cards and stay debt-free is an important part of being a parent and these lessons should start while they are still at home and at an early age. Today, I will look at the many different aspects of credit cards and kids.

Do Kids Need Credit Cards?

Whether parents like it or not, kids will be exposed to credit card offers these days more than ever. Mail-in offers, credit card companies trying to reach out to kids through various marketing and promotional techniques, and the plastic culture society (using plastic is considered cool) we are living in today – will make it impossible to deny let our kids the use of credit cards. If parents don’t allow them to use it, they will get their hands on it without parents’ knowledge; and credit card companies wait to seize these opportunities so they can prey on kids when kids are ready to try plastic without their parents’ knowledge.

That’s why parents should take the early initiative to break financial illiteracy and start giving kids financial lessons while they are still at home. Early education prevents financial disaster and costly mistakes at a later age. If kids know all the ins and outs of credit cards and start using them responsibly under guidance, they will be able to handle credit cards responsibly and in the long run will be able to avoid credit card debt and will score good credit ratings.

Benefits of Giving Kids Credit Cards

• Building Credit: Although a credit card is not the most important factor in building good credit, it can definitely be a good tool to help establish good credit. By using credit cards responsibly and paying bills on time, kids will be able to start building a solid financial backbone.
• Spending Plans: The word “Budget” may be a difficult one for kids to grasp. Create Spending Plans for them and teach the difference between Wants and Needs. Impulse buying can lead them into financial turmoil. Teach them how to spend money wisely on things they need and monitor their credit card bills carefully to make sure they are on track. Teach them the pitfalls of high balances and late payments and guide them to avoid these always.
• Financial Responsibility: Teach kids about financial services and products along with credit cards as personal finance lessons are not given at educational institutions. Early personal finance education will instill values and responsibilities in kids and it is likely that they will analyze various financial steps they take and will avoid debt, paying interest, and actions to ruin their financial future.

What You Need To Do Before Giving Kids Credit Cards

Let’s look at some scenarios you need to consider before giving them a credit card.

• Start Talking: Start talking to your kids about the pros and cons and other aspects of credit cards. Tell them the good things about credit cards such as convenience, credit score, better job prospects with a better credit score, lower insurance rates and so on. Tell them the bad things such as interest, late payments, misuse of the card, how it can ruin their credit rating and so on. Tell them about minimum payments, interest charges, why it is wise to pay the balance in full, the effects of late payments, the effects of spending beyond limits and so on.
• Does He/She Have a Bank Account? Make sure he/she knows how to deal with a bank account and ATM cards, and teach them banking basics before handing them a credit card.
• Is Your Kid Ready? You need to make this judgment call to determine if your kid is ready to handle credit cards. Is he/she responsible and able to handle money and credit cards? Does he/she know when to buy and when not to buy? What to buy and what not to buy? Does he/she have a job to pay credit card bills? If not, how it will be paid? Will he/she be paying off the balance in full every month? Does he/she realize that interest will be charged if the balance is not paid in full? If you think he/she is not ready yet, continue giving them lessons until he/she is ready.
• Lay Out a Roadmap: Tell them exactly what things are allowed with their credit cards and what aren’t. This will avoid confusion later on. Tell them what may happen if they fail to follow these guidelines.

What Kind of Credit Cards Should You Give Kids?

There are different opinions on this matter. Some financial experts suggest that you should start with a debit card first and then switch to a credit card. Some experts argue that a prepaid credit card is the best vehicle to start teaching kids about credit cards. Some experts think parents should add kids to their own card as an authorized user so they can monitor how they are doing. However, my own point of view is little different and I think the best type of credit to start with for kids is a credit card with a lower limit. I will tell you why I think this way and what the problems are with the other views I mentioned above.

First of all, a debit card is a debit card. It comes nowhere near close to giving your kids the experience and lessons you expect to give by using a credit card. Before having their first credit card, they should already have a bank account, an ATM card or debit card and this should be enough to give them the experience of how a debit card works. So a debit card is not an alternative to a credit card and kids should have a bank account and a debit card whether they have a credit card or not.

Secondly, prepaid credit cards may sound like credit cards but they aren’t giving kids the real-life experience of a real credit card. These prepaid credit cards have no monthly bills, interest rates, or late fees, as they are paid before and you can use only up to the amount you loaded onto your account beforehand. So it is missing the real, relevant experience of a credit card.

Thirdly, parents should never add kids to their own credit card account. Parents’ credit card accounts will always have much higher limits than you want your kids to access and it will not give them the sense that they need to be financially responsible, as they will know that this is not their own credit card and they don’t need to act responsibly.

A credit card with a lower limit, $200 to $300 to start with, is the best credit card teaching vehicle for kids to start learning the uses of credit cards and start the journey towards becoming financially responsible.

What You Need To Do After Giving Kids Credit Cards

Monitor the transactions on the credit card account regularly. Make sure they are not buying above the limit or buying the things you asked to avoid. Make sure they are paying bills on time. Reinforce the roadmap you laid out before for using the credit card and make sure they are following it. Discuss credit card mistakes you have made or someone else has made in the past and tell them to use them wisely to stay out of credit card debt. Show them good resources on the Internet to learn more about personal finances and how staying financially healthy can pay off throughout the course of their lives. With all the good intentions, if they falter and are unable to handle credit cards and make small mistakes, help them to bailout – but give them the message that this is not going to be a repetitive act and they will have to pay off the bills by working off their own money.

At What Age Kids Should Get Credit Cards?

It all depends. If your kid is ready to handle it, a credit card can be given to 12 – 15-year old kids. However, don’t continue credit card ties with your kids after 20 + years of age. At this point, this should be the end of their college years and they should be responsible enough to handle their own credit. Let them know at least a year ahead that this will be their last year to have credit cards under your guidance and monitoring.

Last Word

Kids do what they see. Teaching alone will not be sufficient to teach kids about credit cards. Kids will watch their parents and copy their financial behavioural patterns. It is important for parents to be financial role models and set up good examples for kids to follow towards achieving financial success. Bottom line, early credit card education depends on how parents proceed and handle their kids’ credit card journey, including misuses of credit cards. Kids can become more responsible or less responsible depending on their parents’ actions.

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Teaching Children About Personal Finances

When it comes to teaching children about money and personal finances, we all seem to tumble and often it seems like a taboo. Here are some ideas that will help you teach your kids how to become financially responsible and successful in their adult lives.

You should start teaching your children the value of money at a young age. Explain to them the difference between needs and wants and tell them that money does not grow on trees. Money comes from hard work and each of us has responsibilities to our family, community, and the world.

Do not pay kids a straight allowance without guiding them towards what to do with it properly. When you give them an allowance, break it down into categories such as 10% or 15% should go to their savings account, and what other percentages that should be spent to pay for their books, activities, lunch, and so on.

Do not pay kids to do regular household chores that they would normally do. Explain to them what regular chores they are required to do and what chores can be considered special projects they can get paid for – if they are able to complete it successfully. These chores are outside regular ones and you would hire someone else to do it normally. Examples are: mowing the lawn, cleaning the backyard, and so on.

Once kids have a fair idea of what money is, start teaching them how a bank works, what a credit card is and why it charges interest, what a budget is and why it is important. The age range to discuss this would be 7 – 10.

Once kids start earning money, ask them to save 15 – 20 %. Explain to them that it is very important to spend less than what they earn and to save 15 – 20% continuously as they continue working into their adulthood. If they can follow this simple rule, they will be very rich one day.

It’s a very good idea to encourage kids to pursue entrepreneurial and marketable skills. Discuss with your kids what it means to be an entrepreneur and encourage them to use their creativity to find money making ideas or to open a business kids can operate in the surrounding neighbourhoods. Also, explain to them how some skills can pay off for their lifetime and it is worth learning these skills at an early age. Examples are: writing stories, setting up online blog and make money from it, learning graphics designing, learning how to repair a bike, learning how to paint, how to fix a computer, and so on. Don’t pressure kids to learn what you think will be in demand; rather, let them find the stuff they are interested in and wanting to learn.

Explain to your kids that education is very important. Even if they start making tons of money with their business or entrepreneurial skills, it is important to have a 4-year degree. Encourage them to pay their tuition with their own money – as much as possible. This will make them understand the value of each dollar and will teach them to appreciate what they have.

Giving is very important. Teach kids the joy of giving. Explain to them that we live on a small planet called “Earth” and not everyone is as fortunate as we are. We all can help those who need it most by donating, participating in voluntary works, helping charity organizations, and opening ourselves to build a better world.

Teaching kids about money is one of the best things you can ever give to your kids. It will build a solid financial roadmap for them to follow and will help them to secure a better financial future for their lifetime.

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Introducing Personal Finance For Kids Section

In light of the global financial crisis, we all have realized that most of us have little to no experience about how to manage money. Personal finance is not taught in our schools and universities and our kids will repeatedly make the same money mistakes that most of us have gone through and still pay for it for years to come. Personal finance lessons for kids should start at home at an early age. However, most of us are lacking the knowledge and information we need to teach our kids. We all seem to stumble and often it seems like a taboo when it comes to teaching our kids about money and finances.

Considering all this, I have decided to create a new Personal Finance For Kids section on A Dawn Journal – Canada’s Personal Finance Blog. Like all other A Dawn Journal articles, you can expect to find quality articles on this section regarding personal finance and kids. Don’t forget to bookmark this site and let your friends and family know by sharing on social media sites like Digg.com and delicious.com.

Links:

Canada’s Personal Finance Blog

Personal Finance For Kids Archive

Kids Need to be Taught About Money

The Alberta Finance Minister has said that both parents and the government need to take a firm hand in teaching kids how to be financially responsible now and in the future. With the current global financial situation having some bad news for everyone, even among the growing number of positive signs, it is now viewed as absolutely essential that sound financial planning is given the emphasis it requires at all levels, rather than leaving children to find out about the intricacies of the subject first-hand when they leave college and start looking for work. The minister, Iris Evans, said that her own children – all of whom are now grown up – have succeeded in life because she made sure to teach them about money.

Although not everyone would agree with the entirety of the Minister’s speech – which made great play of the importance of each family having at least one stay-at-home parent – the message of teaching children about money and how to handle it is one that will surely recur as we work to get out of the troubled financial climate of the present. At least some of the problems that the world is currently dealing with have something to do with irresponsible consumer borrowing and spending, and if good habits are locked in at an early stage then there is all the more chance that financial crises like the present one will be rarer and shallower in future. What the government may do remains to be seen, but there are plenty of things that a parent can do to instill the right habits in their offspring.

Savings accounts are something that will often be encouraged for the very youngest kids, but when they get to around the early teens the interest seems to drop off quite considerably. Finding a way to encourage your teenage child to save and pay close attention to the value of money is not difficult. All that one needs to do in the present climate to make one’s children pay heed to the importance of sensible financial practices is watch the news with them. As banks, businesses and other organizations battle the ill-effects of financial laxity, there has never been a better opportunity to pass on a message of caution.

It may be increasingly difficult in this day and age to avoid debt in one’s everyday life – particularly if one intends to make a go of a business career at any point – but a bit of financial wisdom can give the children of today the thought processes to deal with the future in a mature and secure way. Don’t teach them to be afraid of debt, but to understand good and bad debt. Don’t let your children see loans as free money, nor see savings as being boring or cheap. Good financial sense starts at an early age, and with a bit of forward thinking can lead to a very satisfactory future. Instilling these messages will mean less likelihood of a repeat of what we are currently dealing with.

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