Financial Education for Kids: Questions and Answers from Advisors
April is Financial Literacy Month, and we encourage you to take a moment to talk to your children or grandchildren about how to lead a sustainable financial life. To help kick-start the discussion on financial education, our financial advisors have answered seven key questions your kids should know and may already be asking.
A credit score is an important number that summarizes your credit history and creditworthiness. The score helps lenders determine how likely you are to pay your debt and pay on time. Here’s what else you need to know:
- Credit scores change over time. It is therefore very important to track your credit score and know how the amount of debt, your payment history and the types of debt you hold affect your credit.
- Checking your score too frequently can cause it to drop. But there are several free tools that can be used to track your credit score without affecting it.
- Having no credit is almost as bad as having a low credit score. That’s why it’s important to start building a credit score when you’re younger. Many people start by having a small credit card or a secured credit card to make small purchases and pay back monthly. The more you make payments on time and keep your debt low, the higher your credit score will increase.
- The higher your score, the more likely you are to qualify for a preferential interest rate. Credit is usually needed for large purchases for which you may not have the immediate savings needed to purchase, such as paying for college, buying a car, or buying a home. . Having a good credit rating allows you to purchase the item on credit while making monthly payments to pay off the debt.
Good saving habits can help you achieve financial freedom. Here are a few we recommend:
- Save early. Save often. Save automatically. This gives you the option to benefit from “compound interest”, which is simply earning interest on the interest you earned the previous month. The longer you dial, the greater the effect.
- Pay yourself first, before you start paying optional expenses and making discretionary purchases. Treat your savings like any other expense and prioritize it. Consider how much you can save each year by cutting out common habits, like buying coffee or going to a restaurant, and consider making automatic, periodic deposits into savings accounts on a monthly basis.
- Remember why saving is important. Your savings will help you prepare for unexpected expenses, meet short-term goals, like going on a trip, and longer-term goals, like buying a house.
Creating a budget is always a useful approach because it allows you to see your cash flow. We recommend that you ask yourself:
- Is it a need or a want? Identify essentials, like your rent/mortgage, utilities, medicine, transportation, and food (needs) and pay those fixed bills first before paying for non-essentials like clothes, games, etc (desires).
- Is this the right time? In times of crisis that affects your finances like the loss of a job, you really have to stick to the basics and make the necessary adjustments. You may need to defer or reduce payments for things like: saving dues, paying by credit card, etc. maybe had to give up.
My suggestion for prioritizing bills when you’re low on cash is to step back, look at what’s most important in your life, and decide what needs your immediate attention. Here are three simple steps:
- List your expenses from most to least important. This should include thoughts about what you can’t live without: electricity, rent, etc.
- Then look at the true cost of not paying each bill each month. A credit card may not be urgent, but if you don’t pay it, there could be late fees plus interest of 20% or more on top of that.
- Then, negotiate when you can on how to spread out your payments. Be sure to do this in a way that makes payments manageable and avoids the high cost of skipping them.
- Finally, tackle the deeper problem. When dealing with short-term issues, work on the bigger issue of not having enough money for the bills you have. Review what’s most important and see how you could cut the cost of each: moving into a cheaper apartment, getting a cheaper phone or phone plan, doing your nails yourself. The key to success is to spend less than you earn, not more.
The goal should always be to have as little debt as possible, but there are some instances where debt can be “good debt”. The two most common examples are:
- Get an education. If you think you can get a better-paying job by going to college or pursuing your master’s, medical, or law degree, it might be a good idea to take out a student loan if you can’t afford it all. But you need to understand how long it will take to pay for itself and ensure that there is potential for a long-term positive return on your investment.
- To buy a house. The same principle applies to buying a house. You also need to make sure that the extra expenses of the loan fit your budget and be cautious about repayment. By being diligent with your personal finances and being responsible for paying off your debts, you can be well on your way to becoming debt free!
The answer will change depending on the age of your children. But I would recommend tackling the lessons on financial education in this order:
- Learn to set goals. With a clear goal in mind, you can better identify your reasons for saving and create realistic plans to achieve your financial goals. Divide each goal into short term and long term. The short term might be buying a new car, while the long term might be retirement; which it is never too early to think about.
- Open a backup account. Your children should start saving as soon as they earn income from a part-time job or when they start working full-time. When my 16-year-old daughter got her first job as a math tutor, I opened a retirement account for her to encourage her to save a little each month.
- Learn to invest. Staying focused and keeping money invested in the market can be rewarding over time, but it can take patience and a long investment horizon. With market volatility, people often panic and make irrational decisions, so it’s important to review your goals and stay focused on your investment goals.
An emergency savings fund is money you have set aside for unexpected life events, like losing a job or paying for a broken down car. You may be wondering:
- Who should have one? It’s a good idea for everyone to create an emergency fund.
- Where to start? When you’re first starting out, aim to save a few hundred dollars in a separate savings account. A convenient way to do this is to set up a direct deposit for your emergency savings account. This allows funds to be automatically transferred to your account.
- How much to set aside? The ultimate goal will be to save three to six months of your take-home pay to prepare for life’s uncertainties. Remember that this can be done gradually depending on your cash flow. Starting your financial education journey early teaches you to plan and that includes planning for the unexpected.
Give your children and grandchildren financial education today to make smart financial decisions at every stage of their lives. Explore our Financial Literacy Center to find content that can help set the stage for lifelong financial well-being.