The United States Department of Agriculture (USDA) estimates the average cost of raising a child to be around $234,900. That staggering amount, of course, assumes you’ll be financially supporting your offspring only until they’re 18 years old. In this day and age, that’s a bigger assumption than you might think, given the high unemployment rate for people under the age of 24 and how little young people know about responsible money management. Therefore, if you want to avoid bleeding money during your golden years and having to convert the basement into a makeshift apartment, you should probably get to work teaching your son or daughter the do’s and don’ts of personal finance.
The financial difficulties that we’ve experienced in recent years should both reinforce the need for financial education and give you a sense of the exact types of skills you need to pass on to your child. For example, the fact that US consumers continue to rack up credit card debt at record rates indicates a glaring need for budgeting skills as well as a reimagining of what actually constitutes a necessity. Among the other important lessons learned from the downturn are:
- It’s important to maintain an emergency fund: This harkens back to the importance of budgeting, but even if you manage to live within your means, an unexpected expense or downturn in the economy could be financially crippling. It’s therefore crucial that you impress upon your children the value of maintaining proper insurance and saving a certain amount of money each month.
- Good credit pays off: Consumers who managed to maintain excellent credit throughout the Great Recession are now reaping the spoils of their hard work in the form of initial rewards bonuses worth up to $500 and 0% introductory interest rate terms that last well over a year.
- Beware hidden fees: Aside from bailouts, one of the primary reasons folks have been so resentful toward banks in the wake of the recession is that financial institutions helped complicate many people’s financial situations during the economic turmoil by using bait-and-switch pricing tactics and burying costly fees in fine print. Make sure that your child knows how important comparison shopping and carefully reading contracts are when it comes to financial products.
Of course, talk is cheap and your child is going to need practical experience if they are going to actually internalize any of your lessons. That is why you should begin a personal finance training regimen where you give your child an allowance using a variety of different financial products and require that they pay for some of their own expenses. The best course of action would be to begin the following process when your child enters high school:
- Load an allowance onto a prepaid card: Prepaid cards are great starter financial products in light of the fact that they don’t affect your credit standing or allow you to overdraft your account. They also provide online account management, which will enable you to review your child’s purchasing and ATM withdrawal habits with them. So give your child an allowance every other week, designate certain expenses that will be their responsibility, and get to work.
- Raise the stakes & use a cash allowance: Cash requires a bit more trust since you’ll have no way of tracking it (unless you work for law enforcement and use marked notes). Graduating to a monthly cash allowance while adding to your child’s list of financial responsibilities will therefore be a good test.
- Switch to a checking account: The risks are once again higher with a checking account since misuse can prevent your child from qualifying for another checking account in the future. If your child is ready, though, checking account use will offer valuable experience writing checks, balancing a checkbook, and maintaining a sufficient account balance so as to avoid incurring unnecessary fees.
- Begin credit building: You’ll want your child to have a student credit card by the time they head off to college, not only for emergency expenses but also so they can begin building credit. One’s credit standing is a key determinant of future credit card and loan rates, job prospects, and their ability to lease a car or rent an apartment. Just make sure your child knows to either make on-time purchases every month or never user their card at all (you build credit either way).
By the time your child graduates from this program, they will be way ahead of the curve when it comes to financial literacy. The prospect of financial independence therefore won’t be scary any longer; many of the most important financial products will actually be familiar to them. In other words, rather than having your child live in your basement until the age of 30, they’ll be able to house-sit once in a while during your now affordable extended vacations.
This article comes from our friends at Evolution Finance, a company that operates the credit card comparison website Card Hub and the personal finance social network Wallet Hub.