Teaching financial responsibility to kids and young adults can be tricky, so it’s no surprise that 72 percent of parents experience at least some reluctancy when talking to their kids about financial matters, according to the 2015 T. Rowe Price Parents, Kids & Money survey. Meantime, one-half to two-thirds of parents who say they set good financial examples for their children also admit they have done things contrary to earning that label.
No parent will ever be a perfect financial role model, but there is plenty you can do to help your teens become financially savvy. Choose a few financial situations to talk through with your teens to help them prepare for adult life. Once they’ve gotten the hang of key financial concepts, add more to the list and let their financial literacy grow. Here are a few conversations from which to get started.
Agreements vs Contracts
Even adults misunderstand the differences between agreements and contracts. It can be confusing that all contracts are agreements, but not all agreements are contracts. Explain to your teens that you can make a verbal agreement or handshake to mow the neighbor’s lawn in exchange for a set amount of money. However, let them be aware a signed agreement that’s enforceable by law is considered a contract.
Talk through different agreements and contracts that may affect your teen’s financial life, like taking out a student loan, getting their first credit card or renting an apartment in college. Advise them that legally binding contracts should always be carefully studied or reviewed by a legal professional.
Terms of Service
Taking out a credit card, signing up for a bank account or downloading a financial app can all help teach teenagers more about financial responsibility. But these examples also come with rigid terms of service. Remember to read and discuss any terms of service of similar offerings with your child or teen and make sure they understand what these terms truly mean. Whether it’s a credit card or bank account, explain that a terms of service agreement is a set of regulations that your teen is committing to follow in order to use that service. Remind them they are contractually obligated to follow these rules or can be terminated from the service.
Teens should also be aware that terms of service can hold them liable for their online behavior, or at times, expose their personal information. For example, Snapchat raised alarm last year when its terms of service changes indicated the company could hang onto private messages and even sell them to third parties.
Credit Card Scams
Credit cards often come with offers that are too good to be true but are actually legitimate. Approvals for high credit limits, 0 percent APR and cash back offers often check out. But that false sense of security can lead to teens trusting credit card scams that lead to identity theft.
Parents should also be mindful and discuss the dangers of common online scams, like email phishing, which attempt to weasel you into clicking on fraudulent credit card links and urge you to sign into an account to fix an urgent matter. Soon enough, your identity and financials could be compromised. To safeguard your personal information, sign up your family for a service like LifeLock that helps to monitor your online identity and can assist you in restoring your credit should your identity be stolen or compromised.
Your teenager needs a solid understanding of interest rates before taking out a student loan, credit card or saving for their future. The first lesson can come from a site like EconomicsHelp.org, which provides various money-saving tips and strategies, including how interest rates are the percentage cost of borrowing money. The website also explains how one’s returns received through investor savings can be deposited into a certificate of deposit (CD), money market account, bond or other investment strategy.
Teens need a clear understanding of the interest rates on their credit card and student loans, and the implications of not paying them on time or in full. Discuss how the minimum payments of a credit card only whittle down the accruing interest and do little to pay off the principle. Focus on how much an item on their credit card actually costs if it’s not paid off and how to stay on top of their bills through budgeting and saving.