Wednesday, 6 December 2017
Part of preparing children for the future is to teach them to manage money, and the first step is to model good financial behavior at home.
Make sure they see you saving, spending wisely, and making good choices about how the family's resources are spent. Don't be afraid to talk to your kids about money. Answer their questions, and explain your financial choices. Take advantage of children's curious nature to help your child's understanding of money and finances.
Here are a few ideas to introduce money and banking to your children:
To really get a head start on your child's future financial well being, consider opening a 529 plan account even before your child is born. This is becoming more common, according to U.S. News and World Report, as parents want to start saving for their child's education as soon as possible. Because 529 plans allow anyone to make a tax-advantaged contribution to the account, parents-to-be see this as alternative to traditional baby gifts.
Most kids start with a piggy bank, which is a great idea since saving is one of the key principles of sound money management. According to Forbes, kids can start grasping basic financial concepts as early as three, but an actual bank account probably won't make sense until about six. Other sources recommend opening your child's account around the age of eight, and that a basic savings account is a great way to start.
Not that it is normally an issue with kids' savings accounts, but it should be remembered that federal law limits the number of withdrawals from a savings account on a monthly basis. If you or your child withdraw more frequently than allowed, the account will either be closed or converted to a non-interest earning account. Knowing all of the rules for each account type is a good idea for both parents and children.
Many banks offer junior savings accounts for kids, though a parent is typically required to have their name on the account and be present when transactions are made. Just make sure you check the minimum balance requirement and fee structure to avoid paying too much for the account. And take your child with you to open it! Make it a special occasion — this could be one of their real “big person" activities — and it should be treated as a milestone.
By now you should have explained the value of saving to your child, but this is a perfect time to reinforce this message. And don't forget to use this opportunity to explain — or better yet, demonstrate — the concept of interest and how it makes saving even more worthwhile. Make sure they are actively engaged with the account. Let them keep the passbook, review and file the statements, and make in-branch withdrawals and deposits (with you along, of course).
As your children become teenagers, they'll have increased independence and autonomy, and they'll need money for lunches and refreshments when they meet their friends at the movies.
Most experts agree kids should have a basic understanding of how to handle cash prior to using ATM, debit, or prepaid debit cards. However, many also suggest plastic is a good way to teach kids to manage money once that foundation is established.
NBC Today Show Financial Editor and author Jean Chatzky suggests introducing plastic between ages 13 and 15 in the form of an ATM or debit card. She suggested giving your child their allowance in a savings account that is linked to your own, so it's easy to transfer the money. Teach them how to use the card, and then how to check their balances online. She also encourages parents to explain the difference between debit and credit cards to their kids. The sooner they understand the concept, she says, the better.
A prepaid debit card can also be a good option, according to the Wall Street Journal and Huffington Post, as long as you do your homework and avoid cards with high fees. The pros of prepaid cards include the ability to set spending limits and monitor spending, and the easy-to-reload card. A prepaid card provides a detailed record of every transaction that allows you to keep an eye on your child's spending. You can use this information to show them where they spend their money, and discuss whether they are making good choices.
Fees are the main drawback of prepaid cards, as they can be extremely high. If you decide to go this route, shop around for the best deal.
The next logical step in this process is opening a checking account for your child. While it varies from bank to bank, most banks offer junior checking accounts to kids between the ages of 13 and 17 with a parent as joint account holder.
And while your 13-year-old child probably isn't going to be writing checks, it's still important for them to understand the responsibility of having a checking account and that it needs to be properly managed.
For your child's first account, it's a good idea to link it to your account for overdraft protection and put spending limits on their debit card. Be sure to read and understand the fees associated with overdraft protection. Remember, they can use a debit card online and in video games, which makes putting spending limits on the card essential. Show them how to write a check, read account statements, and use online and mobile banking to manage their accounts. Teens are very tech-savvy, and they should catch on quickly.
In the beginning, the account might primarily be a learning tool and a way for your child to receive their allowance, but it will be much useful later on when your teen gets a job.
Now for the big question: what about credit cards? If your child is using a debit or ATM card, there really is no reason to introduce credit cards until they prepare to go to college, at the earliest. Federal law prohibits young adults under the age of 21 from getting a credit card on their own unless they can prove their ability to pay the bill. So if you want your older child to have a credit card, you will need to be on the account.
Chatzsky recommends adding your older child as an authorized user on your account. This allows them to use a credit card, but you get the bill. Since you receive the statements, you can monitor your child's spending. Some cards also allow you to set a spending limit on the card. What's more, since your child's name is on the account, this allows them to start to build a credit history — which Chatzsky stressed is extremely important at this stage in a person's life.
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