We do our best when we raise our children, right? Hopefully, we encourage good habits and teach them reliable tools to become independent and confident adults. So your adult child is about to leave home. Maybe he or she just graduated from college and is about to get their first apartment. Or, perhaps they just got their first job and will be living further away. Regardless of the circumstances, making sure they have a strong financial base of knowledge to fulfill their life goals is one of the best gifts a parent can bestow. Let’s take a look at six financial lessons to cover with your kids before leaving home and starting their journey into adulthood.
1. Explain Bank Interest Rates
If your child is starting to pay his or her own bills, they will likely be setting up a bank account. It’s a good idea to advise your child to shop around for the best rates and not just park their money at the first bank they see. Define terms like APY and APR, explain what would cause interest rates to go up or down, and give a quick tutorial on the importance of compound interest. Pointing out that they are making interest on their interest over time will encourage them to shop for the best rates and stay the course!
2. Teach Them About Retirement Accounts
If your child is living independently, they have likely earned income at this point, so it’s a good idea to talk about setting up a retirement account, such as a ROTH IRA. While they may huff and puff about the idea of starting an investment account so early, this is your opportunity to educate them on the value of starting to invest early. When growing and investing your money is on your mind, we are cautious with overspending and making overall good choices financially, which is always a positive thing for your bottom line. Also, investing early means your child will be less likely to have to make riskier decisions later in life to “catch up” in their retirement accounts.
3. Discuss the Importance of Budgeting
Quite possibly, the most crucial attribute of a successful personal financial plan is spending less than you earn. With today’s technology, there are plenty of tools for your child to use to track their spending and see where trouble spots may be, so encourage them to take the time to come up with a reliable way to monitor their budget and make adjustments as needed to stay on course. They will need to account for all of the new expenses that go along with living on their own, but be sure to remind them to budget for “play money” as well. Knowing that they have some money built in for fun will likely keep them motivated to maintain their budget.
4. Show Them the Good and Bad of Credit Cards
While using a credit card is a great way to establish a positive credit standing and can offer nice perks such as travel points or cashback rewards, credit cards should also come with big orange hazard cones as well. Young adults need to know that credit card fees can be excessively high and that unpaid balances can carry over and snowball into a pit of debt from which it’s difficult to emerge. Instruct them to pay off their monthly balances in full when possible and to be cautious of those credit offer mailers that offer low introductory rates with exorbitant rates to follow.
5. Detail the Detriment of Excessive Debt
Showing your child that accumulating debt is something to steer away from will hopefully instill a life long habit of living within his or her means. Take a moment to explain how debt can accrue when balances aren’t paid off. Show them the math behind borrowing within student loans, mortgages, credit cards, auto loans, and what those fees and interest can mean to their overall financial well-being. While not all debt is bad in moderation, such as financing appreciating assets, human capital, or investing in a solid business, you should avoid financing your lifestyle with debt. If you have to borrow to finance depreciating assets, such as high-end clothing, extravagant travel, or various luxury items, you won’t have money left to invest and grow.
6. Educate Them on On Bank Fees
While we’ve already touched on bank interest rates, it’s also a good idea to make your child aware of the fees that banks can charge their account holders. These fees can come from maintaining a balance they deem as too low or even from utilizing paper checks. Tell your child to read the fine print regarding their accounts and that it is a-ok to switch banks if they are being charged too much in fees.
Preparing your child with financial lessons before leaving home will provide him or her with a reliable foundation of knowledge to gear up for what is to come their way on the road of life. Taking the time to educate them on these financial basics will pay dividends for their future well-being and economic stability.
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