The majority of Americans can’t pass a simple financial literacy test, according to a study by the FINRA Foundation. The majority of Americans don’t have a “rainy day” fund either, according to the same study. In short, a surprisingly large number of Americans are not financially literate, and this is leading to poor choices.
The average American owes over $16,000 in credit card debt. To put that number in perspective, the median household income in the United States last year was a bit over $55,000. That means that most Americans would need to spend 30% of their pre-tax income to pay off their credit card debt.
These stats paint an ugly picture of the ways in which Americans spend their money. Fortunately, there are ways parents can help their kids adopt good financial habits so that they’ll be able to avoid needing to do any credit repairing in the future.
Simulate the Real World of Finances
According to their most recent Parents Kids & Money survey, T.Rowe Price found that 70% of parents give their kids an allowance. Of parents who provide their kid with an allowance, 86% require that their kids somehow earn the money. The same study found that 86% of parents who give an allowance do so by giving kids cash. Only 6% put the money in their child’s bank account.
For parents interested in teaching their kids about money, giving an allowance can teach children about the value of money. One option is to provide kids with an allowance but to incorporate taxes into the equation to teach children about some of the real-life obligations adults face when managing money.
Build a Strong Credit Score Early
For parents with teenage children, it is a good idea to open a bank account that is tied to a credit card in their name. Doing this can teach kids how to responsibly manage a credit card while avoiding interest rates. It can also help to improve your child’s credit score. Age of credit accounts for 10% of FICO credit scores. the earlier kids have a line of credit in their name (even if it is shared with a parent) the sooner their credit score will improve.
You and your child can even monitor their credit score together with the help of free credit monitoring tools. Credit Karma and Credit Wise are two free apps that make it easy for anyone to access reliable information about TransUnion and Equifax credit reports.
Teach Them About Investments
If you invest $100 today and invest another $100 each year after that, in 25 years that investment will be worth $8,580.90 - assuming an 8% interest rate. Teaching kids how to wisely invest their money will provide them with a valuable life long skill that can pay big dividends.
There are a number of great tools that can help parents teach kids how to invest wisely. Kahn Academy has a series of great courses about stocks and bonds that can help any parent teach their kids about making smart investments. When you and your child are ready to get started, apps like Robin Hood or Acorns make it easy to get started with stocks or ETFs.
Start a Savings Account for Them
Rather than letting kids spend their money on new electronics, like a cool television, parents who start savings accounts for their kids are doing them a great service. Opening a joint savings account for your kids, even when they’re young, makes a big difference in the long run.
If for example a parent is able to save some portion of the money children receives for various milestones, like a communion or bar mitzvah, money that would otherwise be spent on toys or trivial items, can later be used for important things like college.
For parents interested in helping their kids save for college, a dedicated 529 plan may make the most sense. These plans provide parents with tax incentives to save for their children’s future and help to ensure that kids will have the money they need to attend college when the time comes.
There are many different ways to teach your kids to have good spending habits. In some cases it may make sense to give your child an allowance that also teaches them a few realities about money management. Alternatively, it may make sense to help your kids understand what a credit score is and to help them get started by opening a credit card in their name. Teaching kids about saving and investing smartly will also make them more financially responsible.