Parents of all income levels worry about their children’s financial savvy. But for affluent parents, the worry becomes magnified. In an earlier blog post, I wrote that most wealthy parents don’t believe that their children are ready to inherit. They don’t believe that, once independent adults, their kids will be able to make, keep, and preserve money.
In response to these fears, I recommend to wealthy parents that they start teaching their kids about money early.
A recent article in CNN Money states the importance of teaching teens about money. (I would argue that you should start finance lessons before then.) The article reported that, according to a Capital One poll, 87% of teens ages 12 to 17 “reported knowing at least an average amount about managing finances.” However, the same study found that 24% of the teens surveyed thought that a debit card is used to “borrow cash.” Apparently, teens do not know as much about finance as they think they do.
But can we blame them? If no one teaches them the basics, how will they learn?
To make sure that your kids are ready, take a few tips from the article, which outlines the three things that every teen must learn:
Managing a limited budget
The key word here is “limited.” Everyone has some sort of budget, no matter his or her income level. Kids need to be taught that money is limited and that they should not spend beyond their means. The CNN article recommends taking the money that you would spend on your kids’ clothing, entertainment, and gifts and giving it to them. Help them develop a budget for each category and let them spend the money. If they mess up, fight the temptation to bail them out. It’s important for them to understand the consequences of financial mistakes—before adulthood, when the penalties for financial errors are much more serious.
So many individuals and families budget by determining what they want to spend money on and then putting the rest away in savings—when it really should be the other way around. Help your kids learn to save first, encouraging them to save 10% of their paycheck, birthday money, or allowance. Teach them how saving their money can give them even more money through compound interest. You might even offer to match whatever they save to promote good habits.
Avoiding credit card debt
You hear horror stories often of kids going away to college and ruining their credit score and finances through massive credit card debt. To prevent your kids from doing this, teach them how credit works. Let them know that using credit is borrowing money and that you have to pay even more when you don’t pay off the card each month. When your kids do get a credit card, make sure the limit is low.