One study of undergraduates found 60% of college credit-card holders experienced surprise when told how high their balance had reached—and 40% admitted to charging items they knew they couldn’t pay for.1
For current college kids, it may be too late to avoid learning the hard way. But if you still have children at home, save them (and yourself) some heartache by teaching them the basics of smart money management.
Tip: Give Them a Look. Find a credit card calculator on the web to give your kids a real-life look at what it actually costs to “buy now, pay later.”
Have the conversation. Many everyday transactions can lead to discussions about money. At the grocery store, talk with your kids about comparing prices and staying within a budget. At the bank, teach them that the automated teller machine doesn’t just give you money for the asking. Show your kids a credit card statement to help them understand how “swiping the card” actually takes money out of your pocket.
Fast Fact: Hidden College Cost. College seniors typically graduate with about $4,100 in credit-card debt. (Salliemae.com, 2012)
Let them live it. An allowance program, where payments are tied to chores or household responsibilities, can help teach children the relationship between work and money. Your program might even include incentives or bonuses for exceptional work. Aside from allowances, you could create a budget for clothing or other items you provide. Let your kids decide how and when to spend the allotted money. This may help them learn to balance wants and needs at a young age, when the stakes are not too high.
Teach kids about saving, investing, even retirement planning. To encourage teenagers to save, you might offer a match program, say 25 cents for every dollar they put in a savings account. Once they have saved $1,000, consider helping them open a custodial investment account, then teach them to research performance and ratings online. You might even think about opening an individual retirement account (IRA). With the future of Social Security in question, your kids may be on their own to pay for their retirement. Some parents offer to fund an IRA for their children as long as they are earning a paycheck.2
As you teach your children about money, don’t get discouraged if they don’t take your advice. Mistakes made at this stage in life can leave a lasting impression. Also, resist the temptation to bail them out. We all learn better when we reap the natural consequences of our actions. Your children probably won’t be stellar money managers at first, but what they learn now could pay them back later in life—when it really matters.
Can Kids Handle Credit?
Some 71% of parents do not support giving credit cards to children under 18—even if the card has a restricted balance and is linked to a parent’s account.
Chart Source: ABCNews.go.com, 2010
1. Salliemae.com, 2012 (Initial study published in 2009.)
2. Contributions to a Traditional IRA may be fully or partially deductable, depending on your individual circumstance. Distributions from traditional IRA and most other employer-sponsored retirement plans are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions.
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