Here are some key financial lessons your child probably won’t learn in school and ways you can help rectify it.
1. Debt: Understanding how debt and loans work is vital. Most kids have their dream car or college picked out but have no understanding of how to pay for it. Using real-world examples like your mortgage or car payments can be a good way to explain principal, interest rate, monthly payments and the consequences of missing them, and maturity dates. You can also explain why you chose a certain loan over your other options to help them understand what to look for.
High school is also a good time to start talking to your children about student loans. With college around the corner, it’s a natural segue into the topic. Talking about the various borrowing options—such as federal loans, private loans, and PLUS loans—their related interest rates, what could the loan pay for, and additional options for tuition like scholarships and financial aid are important conversations that can help your kids make informed choices.
A lot of people fear debt, but not all debt is bad. Teaching your children the difference between good debt and bad debt is key. For example, taking out a student loan to get additional certification that could potentially increase earnings is an example of a good debt. Taking out a car loan for an expensive vehicle is an example of bad debt since the value of the car probably will only depreciate over time. Understanding how each type of loan accrues interest can also help differentiate between good and bad debt and the urgency to pay it off. For example, credit cards accrue more interest than a mortgage, so credit cards should be paid off in full, if possible, while a mortgage can often be stretched over a 30-year period.
2. Compound interest: Compound interest will help your money grow faster than simple interest, because with compound interest you’re earning returns on the original sum of money invested and the returns earned at the close of every compound period. Put simply, even your interest earns interest through the power of compounding. The best way to take advantage of compound interest is to start investing early.
3. Credit: Credit cards stop being a magical piece of plastic to buy stuff when you start paying it off. It’s easy to mess up your credit rating and go into debt with credit cards if you don’t understand how they work. Start by introducing your children to debit cards and monitor their responsible usage. Teach them the importance of responsible spending, paying back cards on time, how much interest they’d accrue if they miss their payments, and the importance of having a good credit rating.
4. Personal finance: All kids should learn how to manage a budget. Opening a savings account and learning to save regularly, even if it’s a small sum of money, can encourage the habit of saving. Your kids are going to thank you one day for teaching them to save. Knowing how to write a check is also helpful knowledge to have.
5. Investing 101: Teaching your kids the basics of investing can be very helpful. Understanding that stocks are issued by publicly traded companies and bonds by companies, governments, agencies, and municipalities to raise money is a good starting point. Talk with your kids about the importance of having a retirement plan, the benefits of starting early, and diversifying their investments.
Another good idea: Have your children meet with your financial professional, who can help provide guidance on all the major financial milestones in their lives, including using a 529 education savings plan.
This material does not constitute financial, tax, legal, or accounting advice, is for informational purposes only, and is not meant as investment advice. Please consult your tax or financial professional before making any decision.
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