As children prepare to leave the nest, there is a list of a thousand things you want to make sure they know before striking out on their own. As a parent it is impossible to give them every skill and impart all of your wisdom and life experiences on your children, even though it might prevent an array of mistakes that often come with the territory.
There are, however, a few financial skills that will help your children defend against aggressive companies and stake their financial claim. These important skills include:
1) Basic Money Management Skills. This includes how to establish a realistic budget and use that budget to facilitate financial spending decisions. This also includes teaching your children to live within their means. Children often have to learn to live on a much smaller budget than they had access to while living at home. Skills like discount shopping, saving on food and learning to cook at home can help with restricted budget realities.
Fortunately there are a number of great apps available that can help make this a reality. Apps are not a magic bullet, children must know the basic mechanics of a budget before they will be able to follow one on a smartphone.
2) Ability to Balance Accounts. While the checkbook is no longer used by the upcoming generation, there is still a need to balance accounts. They must establish spending goals and connect that with actual spending patterns. Failure to successfully do this can result in high bank fees. Other basic mathematical skills include ability to make changes and do basic math calculations in their head. These skills will help children avoid scams, know if accounts are right, and if correct change is given.
3) Importance of Paying Bills on Time. Every bill has a penalty when it is paid late. Young adults who understand the consequences of late payments can reduce fees associated with not paying on time. Some bills like a utility may have a small late payment, but if the service is disconnected, the full balance must be paid along with a reconnection fee. Credit cards have a zero grace period where rent and car payments may have 5 days or more before a late fee is charged. This information will allow them to set a budget and schedule payments in a way that minimizes fees and other charges.
They also should understand that late payments impact their credit if they are more than 30 days late. Leaving bank accounts, cell phone carriers and other services with negative balances will come back to haunt them in the form of negative marks on their credit score.
4) Know How To Read A Contract. Contracts are seen in every aspect of life. Whether they are signing up for a cell phone, setting up internet service, or getting a student loan. Each transaction will involve them signing a contract. There are key elements of contracts that must be understood to avoid major financial penalties when contracts fail to be met. Recognizing the importance and consequences of what they are signing will help them make better financial choices.
5) Understand Credit, Debt and How to Effectively Use Credit Cards. Debt has plagued Americans and results in higher costs and more limited choices when it comes to upward mobility. Yet credit is essential to building wealth and gaining purchasing power. The ability to balance credit and debt will put them ahead of their peers. Understanding credit scores, credit reports and why they are important. They should have a good understanding of interest and how that impacts the total cost of goods and services. Learning how to use credit cards and when it is a good idea and when they should be avoided are among the basic financial skills they need to know.
6) Know The Basics of Saving and Investing. Most teenagers do not have extra funds to practice investing. Yet having a mentality that looks for things of value and ways to grow money is a trait that will help them build a strong financial portfolio over their lifetime.
7) Recognize the Emotional Connection To Money. Everyone has emotional triggers that cause overspending. Learning to recognize how money comforts us when we are scared, sad, lonely or celebrating can help reduce overspending. Once they see the triggers they will be able to identify other ways to deal with those emotions. These triggers may be amplified as they venture out on their own.
8) Set Life Goals to Give Their Life Direction. Children tend to be resistant of what you tell them because they want to feel “free”. The irony is that many of the principles parents try to teach will give them the freedom they seek. This is especially true when it comes to money and finances. The idea behind a budget is not to “tell them how to spend their money.” But instead, to give them control over where the money goes so that they reach their goals and objectives.
9) Everyone Makes Mistakes, including financial mistakes. If they learn from the mistake they will manage money better and have greater financial control over time. If they do not take the time to recognize, evaluate and monitor mistakes they will be made over and over, limiting progress.
10) Build Good Decision Making Skills. Nearly every decision in life involves money. Do they want to drive a certain car, attend a certain college, or travel the world? All of these goals take money. Want a new television, the newest smartphone, or the latest video gaming system, all of that takes money too. Want to buy a home, raise a family, how will they fund it? Life’s decisions almost always involve money in some form or fashion. There are also very strong advertising forces which try to persuade them to spend money a certain way.
Understanding how to make decisions and learning that money is a tool, not the end result, will help them make better choices and avoid costly mistakes along the way. They should also learn to evaluate costs of borrowing to reach their goal versus saving for the things they want.
Money is something nearly everyone wants more of and yet everyone seems to be struggling to get enough. Advertising creates an emotional pull to buy their way to happiness. Learning early on that money cannot solve problems, but can be a means to an end to the things they seek will give them a tremendous advantage.
Having these 10 financial skills in their arsenal will help them live productive lives with financial freedom few are able to obtain.