Don’t underestimate how much your kids learn from your behavior with money, credit, debt, budgeting, impulse purchasing, and savings. It’s all about your behavior with money, and very little about what you say. Since 80% of teenagers never take a class on finance or credit, you’re it. What you do today is what they’ll likely adopt for the rest of their lives.
Next time you (or your child’s grandparents) are looking for a present for an eight year old (or older) consider buying them a couple of shares of stock in their favorite company. If they love a certain game, clothing line, or shoe company, one or two shares of the company stock will have them become interested in more than just the product.
It’ll give you a great way to have them look at the stock price each month, watch what happens when a new product is released, or search the company web site for any announcements. Your son, daughter, niece, or nephew now has a gift that keeps on giving and teaching. When you’ve piqued their interest in following the stock and learning some basics, you can easily expand the lessons to include mutual funds. That’s when the lessons of diversification, risk, and more come to light. At that point, you can also consider matching any of their savings to buy more mutual funds as a huge incentive to start saving. It’ll be the biggest gift you can give, and it’ll pay off for their lifetime.
If you have a teenager in the house, it’s critical you teach them about credit. An easy way is to give them a make-belief credit card to use or abuse as they see fit. Give them a piece of paper with their name on it, a credit limit, and an interest rate. Make the rate one percent per month, it’s a great credit card rate and easy for you to calculate. Give them their allowance like normal and allow them to charge on their card up to its limit. Don’t harp on what they owe and don’t write it down for them (you just keep track yourself). It’s the same way your credit card company treats you. At the end of the month, give them a note with the old balance from the month before and the new charges. Add the one percent interest and a minimum payment of 10% that comes right off their allowance.
Take it as far as you’d like, but there are lots of important life, credit, prioritization, and debt lessons in this exercise. Soon, your son or daughter will be at their limit, they’ll have payments, and interest keeps growing. They may not be making any progress on reducing the balance,, their allowance is being eaten up by something they spent months ago, but they can’t go in arrears.
Or, perhaps your son or daughter immediately sees the convenience, and also the danger of credit cards. Take the exercise seriously and don’t give in to the first whining that your teenager is now broke and it’s your fault. After all, in a few years this game will become very real, very quickly, and involve lenders who couldn’t care less about anything, as long as they are paid and making a profit.