You know intuitively that your child requires basic needs: food, clothing and shelter. Maybe a little cash every now and then for smoothies, sports fees or a new pair of jeans.
It’s expensive to raise children to 18 — and beyond. Financially supportive parents commit to helping their children learn all they can about money and eventually, support financial independence.
Financially supportive parents all have these things in common.
1. They Educate Their Children About Money
Money is not the key to happiness, but a lack of money can certainly sometimes lead to misery. Teaching your kids financial literacy is important.
It can help shape their entire worldview.
2. They Help Them Understand Loans
Whether they help their children understand the difference between student loans and auto loans, financially supportive parents teach their kids about loans and that you must pay them back. Parents who teach their children about loans should also teach them about interest. Here’s a good kid-friendly explanation: Interest is the amount you pay (a percentage of a loan) to a lender for the privilege of borrowing money.
It’s not enough to teach kids about the “evils” of loans, because they’re also beneficial. They can help your child build credit and buy things that really matter someday, like a car or house — or pay for college.
Speaking of
student loans, your child might need them to pay for college.
Federal Direct Student Loans
Teach your child the basics of student loans, and in particular, Direct Unsubsidized and Subsidized loans.
Explain how your child needs to pay back these loans, which could be through an income-based repayment plan upon graduation if he or she might qualify.- Federal Direct Student Loans may qualify for forgiveness, which means your child may not have to repay the loan. This depends on which career your child chooses after graduation.
- Federal Direct Student Loan interest rates are typically lower compared to Private Student Loans.
Private Student Loans
Private Student Loans fill in the need gap after your child exhausts all scholarship, grant, savings and federal student loans. It’s a good idea to choose Federal Direct Student Loans before Private Student Loans, if possible. Private Student Loan interest rates are higher. In addition, private loans often require a co-signer — usually you, as the parent. As a co-signer, you must have a good credit score and you may consider debt-to-income ratios.
Finally, remember that co-signers are just as responsible for paying back loans.
Talk to your child about a plan to repay private loans before they opt for student loans.
3. They Help Kids Set Up Bank Accounts
One of the best ways to help kids understand the idea that money grows best when you invest it is to open bank accounts for them. A savings account is a great option for little ones — a bonus is going to an actual bank and watching the teller take the money. (My little kids get candy from the teller every time — they love the bank!)
A checking account is a great idea for high schoolers to learn how to budget and track money. Show your kids how you check your accounts online and how you use your checking account.
These basic tools are a great way to start building a financial foundation that lasts. It also teaches kids that saving money is important.
4. They Help Kids Understand and Use Credit Cards
What’s a major benefit to helping your child build credit early? It can help your child establish a positive payment record — the most important component of your child’s credit score.
Kids
younger than 18 years old usually cannot get credit on their own, according to Experian. However, it’s a great idea to help kids establish a credit history when the time comes, have a card handy in case of emergencies or help them learn about responsible credit card use.
But what type of credit card is best? Let’s explore your options.
Co-Sign a Credit Card
You can co-sign a credit card for your child, which means your bank will charge you for the money if your child doesn’t make the payments. It can also have a downside — it can affect your credit score if you refuse to pay for your child’s clothes, shoes, video games and other things he or she ran up on the plastic.
Consider the implications of becoming a credit card co-signer for your child and explore whether it’s right for both of you.
Add Your Child as an Authorized User
You could also add your child as an authorized user, or secondary account holder, to one of your credit card accounts. Your child may receive his or her own credit card and account number on that card. In addition:
- You can decide not to give your child the actual card.
- Some credit card companies allow you to give your child a monthly spending limit.
- The primary cardholder (you) can view all purchases through push notifications.
- You can remove your child from the account if you believe they’re not doing a great job of limiting spending.
Any damage to your score is temporary, but you are legally responsible for any debt that piles up.
Consider a Secured Credit Card
A secured card is another option — it’s like taking baby steps toward using a regular credit card.
You put down money for a secured card — say, $300 to $500 — and that means your child cannot spend over that amount.
You incur zero risk because your child is the account owner. However, it’s a good idea to know what’s going on with that account.
Talk About Student Credit Cards
Look into the pros and cons of a student credit card. At some point, the issuer might bump your child up to a regular (unsecured) credit card due to good standing with the card.
5. They Help Kids Start Thinking About Retirement Early
Yes! It sounds crazy, doesn’t it? However, it can majorly benefit kids to save for retirement with their first paycheck. And yes, that includes high school jobs, whether they work at an ice cream shop or lifeguard at the pool.
Financially supportive parents encourage kids to put money into a Roth IRA. Make it fun! Match your child dollar-for-dollar or do something similar as a reward for putting money in a retirement account.
Teenagers can save for retirement using babysitting, lawn mowing, etc. as well. Now, that doesn’t mean you can pay your child $1,000 an hour to mow the lawn and stuff the money into a Roth IRA. As long as you keep excellent records from odd jobs that do not provide a W-2, you can call that earned income — within reason.
6. They Teach Financial Independence
Today’s young adults stay in school longer, marry and establish their own households later than in previous generations. Many live in their parents’ homes into their 20s and 30s.
Whether your child faces economic challenges or other goals and priorities, it’s a great idea to set them up with the knowledge of how to become financially independent. Help them put goals in place to reach financial independence.
7. They Help Pay for College
So, this could be contentious because many parents may believe it’s not their responsibility at all to pay for college. But — you’ll find benefits to helping your child pay for college:
- Your child may not make so many loan payments over his or her lifetime.
- Students can focus on education instead of working full time and may even be able to graduate more quickly.
A key piece of advice: No matter what financial advice you're instilling, consider the benefits to your child and what you wish an adult had taught you when you were a kid!
Melissa Brock
Contributor
Melissa Brock is the founder of College Money Tips and is also the Money editor at Benzinga. She spent 12 years working in college admission, then turned to freelancing and editing. Nothing invigorates her more than writing about college and money and helping families navigate the college search process.
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