April is National Financial Literacy month! Ironically, I’ve had to teach my young-adult children about finances recently… I guess I just assumed they would learn about this on their own? I wonder, why would I think that? My parents never discussed finances with us. I wasn’t “taught” how to open a bank account…I just did. Many of us just figured things out on our own- Including how to mess up our credit and then spend forever fixing it! So let’s get into it.
Here are 7 financial skills your child needs to function in the world without you.
- Basic Banking – I would introduce banking to kids as early as ages 14 or 15. Open a trustee checking and savings account and stick their birthday and Christmas money in that account (along with any money earned for chores, babysitting, etc). Sit down and explain bank fees and interest with your kids. Although it should go without saying, explain that you can’t write a check from a savings account. Grrr! Yes! My 17-year-old wrote a $14 check for a school function when he only had $6 in his checking account. The bulk of his money is in his savings account. The check cleared, but he was charged $35 by the credit union for insufficient funds. So, yeah…cover all your bases!
- Employment and Income – When your child gets their first job, you will need to help them set up a few things. One, they will need to know how to fill out the W2 Employee’s Withholding Certificate. Depending on the type of employment and wages, you can advise on the best way to complete the form. Don’t forget to explain that, at the end of the year, that form will be used to calculate the W2 for tax purposes. They should expect their W2 in the mail sometime between January and March of the following year and they might be required to file a tax return. Two, you will need to help them set up direct deposit, so that when they get paid, their check will post to their account electronically. This is the best way to get paid and many times it also means getting paid up to 2 days earlier.
- Budgeting – Create a monthly budget with your child. Their budget can include things like: entertainment, clothes, transportation, cell phone, etc. Decide how much of the income will go towards savings and how much will stay in their checking account. Will your child give themselves a cash allowance and if so, how much per week or month?
- Consumer Skills – This is so important, especially in the age of internet scams! Teach your child how to do product and store research. Check reviews and do price comparisons to ensure you are getting the best value for your buck. Don’t just go out and overpay for items. They will soon learn the value of their own money. It will shock you how quickly they learn that paying $150 for a pair of shoes isn’t as appealing when it’s their own hard-earned money.
- Manage Credit and Debt – Teaching your child about credit and helping them achieve a minimum 700 credit rating at 18 years old is so powerful! At 17, you can add your child to one of your credit cards to help them establish credit. If you buy a car for your kid and you are planning on financing it, you can add them to the account. If your child is enrolled in any community college classes, they can apply for student credit cards. I personally feel the Discover IT card for students is the best, but coming in a close second is Capital One for students. My daughter did High School and College concurrently. At 18, she applied for a student Discover card and, at 19 years old, she has a credit rating of nearly 800! You have to explain how to use credit cards and how to monitor the card app for FICO scores. My advice to my daughter was for her to use the card for everyday little things and pay most of the card off at the end of the month. Leaving a small balance is the best way to increase your credit rating.
- Finance Higher Education – Fill out the FAFSA with your student and help them search for scholarship opportunities, fellowships, work-study programs, etc. Loans should be the nuclear option. Take a loan out only if there is NO OTHER OPTION!
- Insurance – If you or the other parent have your child on your insurance, they will be covered until they are 26 years old. However, if you do not, they will need to apply (if you live in California) for insurance through the marketplace or be dinged during tax time for not having insurance. If their employer offers insurance and benefits, then help them decide about what coverage is best for them.
I hope this information helps! Or at least gets you to start thinking about your child’s financial future. Of course, there is so much more to cover, like teaching them how to open utilities in their name, but just know that our kids won’t automatically know how to do these things and we have to help them.
Finally, here is a link to a reality check tool for your young adult… you know, the one that has life all figured out and can’t wait to leave home!
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