Kids already have a lot to learn between school and ever-changing social norms. But one thing that will never go out of style is good financial habits. As a parent, you are your child’s first teacher, so it’s up to you to set a good example for their financial future. To make this easier for you, we’ve compiled some of our best tried-and-true money tips spanning childhood through early adulthood.
Kids Under 18: Teaching Good Money Values and Habits
What has your child learned about money by age five? The answer might be more than you think. Many of our thinking, learning, and reasoning processes are developed by ages four and five. Simply put, young children are developing attitudes about money and observing financial cause/effect relationships in their own life. For example, do caregivers seem stressed about money? Is it something parents argue about? Now is the time to talk to your kids about money in terms they can understand, such as:
- “We earn money by working.”
- “There are things the family wants to buy, too, but we all have to wait and save enough money first.”
- At a grocery or big-box store: “We’re just here to buy the things we need today.”
- “We make choices about how to spend our money.”
As your kids grow, you can help them learn to differentiate between wants and needs, strengthen their delayed gratification muscle, and experience the joy of saving. Try using a clear glass jar instead of a decorative piggy bank for your child’s savings. They will be able to see their money grow in real-time as they add coins and bills.
Once your child has filled their jar at home, it’s time to take that money to the bank. At JSB, we offer a youth savings account for anyone under 18 who has a secondary account holder over 18. You only need $5 to open a youth savings account at JSB and there are no monthly charges or transaction fees. Consider us your local financial partner, making it as easy as possible for your child to grow their savings account balance. Any balance greater than zero earns interest.
Now is also a good time to open a college savings account for your child if you haven’t already. Smart 529 is West Virginia’s tax-advantaged college savings account. Funds from your 529 account can be used for qualified educational expenses at institutions of higher education across the country. You can also use it to pay for K-12 private school. Every state has its own 529 plan - here’s information on the Maryland version.
Now things get fun with compound interest
Compound interest is the key to saving. It’s how adults grow their retirement accounts and it’s a great money lesson for kids. “If you choose to spend this dollar, it will be gone. But if you deposit it into your savings account, it will continue to work for you. The interest you earn on your savings account deposits becomes part of your balance and earns more interest. That’s how interest compounds, in a nutshell.
Some parents incentivize their kids’ saving with matching deposits, just as an employer can match a percentage of an employee’s retirement account contributions. However you approach it, definitely take the time to review your child’s monthly savings account statement with them so they can see compounding interest in action. “Look, we haven’t made any new deposits since the last statement, but your balance still increased. Pretty cool, huh?”
Interest can also work against you, i.e. debt.
Once your child is riding high on the notion that they can grow their money without lifting a finger, it’s time to show them the dark side of personal finance. This means debt.
Of course, kids under 18 can’t open their own credit accounts, but they’ll face these decisions as soon as they reach legal age. Thus, it pays to talk about debt and loans with your kids, just as you talk about saving and spending.
For example, if your child is with you at a store and you pay with a credit card, take a minute to explain. “I’m using a credit card to buy groceries because I’ll earn rewards for it. A credit card is basically a loan, so you have to pay it back. I’m going to pay back my credit card with cash from my checking account. If you don’t pay all of your balance when it’s due, you’ll have to pay interest to the credit card company, just like the bank pays you interest for your savings account. Isn’t it more fun to get free money than to give it to someone else?”
With today’s financial technology, credit cards aren’t the only kind of debt your new 18-year-old will be offered. There are personal and car loans, of course, as well as new apps that offer installment loans on online purchases and “early wage” payday advances. And if your child goes to college, they may need to take out federal or private student loans.
The decisions a young adult makes around debt can have lasting effects well into adulthood. At the same time, responsible use of credit will help your child build a good credit history and score. This is important not only for future events like buying a home, but also for renting an apartment, passing an employer’s background screening, and more. As a parent, all you can do is prepare your child to make these decisions, so they understand what the effects will be either way.
Choosing a College and Understanding Financial Aid
The rising cost of college, accompanied by our rising national student debt balance mean families must be more careful in how they approach the choice of college and how they pay for it. In short, price should be your highest priority, more important than emotional appeals such as a beautiful campus, new amenities, or a general feeling of “belonging here.” Comparison shop with the goal of getting the best education for the lowest possible price.
Hopefully, you’ve been saving for college in a 529 account. Still, you may not have enough saved to cover every last expense. That’s where financial aid comes in. The most important thing to remember is that financial aid encompasses both “free money” (scholarships and grants that don’t need to be repaid) as well as federal student loans (money that does need to be repaid) disbursed through the school. Here are the best tools for estimating and understanding college costs:
- Use the FAFSA4caster to estimate your child’s federal student aid eligibility.
- The College Scorecard from the U.S. Department of Education enables families to compare schools based on cost, graduation rates, and other important factors.
- Each college should have a net price calculator on its website. For example, here is West Virginia University’s calculator. In addition, here is the University of Maryland’s calculator.
- Browse the Federal Student Aid website to learn about the different types of grants, work-study programs, loans, and scholarships available.
In this phase of life, young adults are learning to “launch” on their own, whether into college or the full-time workforce. Here are the skills kids need to master at this age:
Most young adults are living on a shoestring budget at this age. Small expenditures can add up quickly, which is why expense tracking is a key personal finance habit. Just the act of recording what you spend money on can make you more aware. From fixed expenses like a monthly rent, to impulse purchases at the convenience store, encourage your 18-21-year-old to log their expenses, whether in a notebook or spreadsheet.
Making a Budget
Once you know where your money goes, you can create a more intentional road map for your spending. Many people hear the word “budget” and cringe, but at its core a budget is punitive nor restrictive. Instead, the act of making a budget simply acknowledges the fact that money, like time, is a finite resource. Allocating every dollar in advance gives you more control over your finances. Then you can prioritize certain goals (like buying a new car or taking a vacation) over mindless discretionary spending (like eating out too much).
There are many ways to create a budget. You can do it with pen and paper, use a spreadsheet template, or sign-up for a software program. The important thing is to find a method you like and can stick with. The simplest budget consists of subtracting fixed expenses from income and then deciding what to do with however much is left over.
We covered the dark side of debt above, but if you avoid credit altogether, you won’t be able to build a good score. Student loans are one way to establish a credit history. Another is to apply for a credit card with a small limit, like $500, and use it for one expense a month, always paying off the full balance. Opening utility accounts in your name and making on-time payments will also help with your credit score and history.
Ages 21 - 25: Long-term Planning
The early twenties are a time of self-discovery and experimentation. Some young adults get married at this age, while others are still trying on different careers and relationships. Regardless of your circumstances, it’s time to think long-term. Turning 30 may still seem like a far-off milestone, but the financial decisions you make now can have a profound effect on the next few decades of your adult life.
Paying Down Debt
Do you have student loan debt or a revolving credit card balance? Now is the time to get ahead of your debt instead of letting it follow you into the next decade. Before you take on more responsibilities, like starting a family, leverage your time and energy to take on a side hustle or two and put the extra money toward paying down debt.
Saving for Retirement
Whether you’re already a few years into your career, or just getting started after college, you need to take advantage of employer-sponsored retirement accounts, like the 401(k), if you have access to that. Workers without retirement benefits at work can open Individual Retirement Accounts (IRAs).
Of course, 401(k)s and IRAs are investment accounts, meaning there is some risk of loss in the stock market. If you’re looking to add to your retirement portfolio with a risk-free savings method, try a Money Market Account.
If you remember our earlier lesson on compound interest, you’ll understand why starting as early as possible will give your retirement savings more momentum.
Starting a Business
Thanks to the Internet, it’s easier than ever to start your own business. Entrepreneurship can be attractive for many reasons, including the ability to set your own schedule and answer only to yourself. As your business grows, you may need financing to expand. Check out our commercial loan options.
Start Their Financial Education at Jefferson Security Bank
No matter what stage of life your child is in, Jefferson Security Bank has a variety of financial products to help them thrive - including our Youth Savings and Youth Checking accounts. Ready to get started? Visit one of our locations in Shepherdstown, Martinsburg, Charles Town, Inwood and Sharpsburg. Have questions about any of our accounts or lending services? Get in touch with us today to speak with a member of our team!