Do your kids know the difference between wants and needs? Think they're too young to learn about taxes? Or saving for retirement? Oh, you have so much to teach them.
By Bankrate.com
When it comes to financial literacy, today's graduates fail to make the grade.
Asked about basic financial concepts, high school seniors correctly answered only 48% of the questions, on average, down from 52% in 2006, according to the Jump$tart Coalition's recent survey on financial literacy.
College students didn't fare much better, with seniors scoring an average of 65% on a separate survey that was administered for the first time in 2008.
Why do so many miss the mark? It starts in the home. Whether parents lack confidence in their own money-management skills or assume their children's schools will cover it, many parents don't talk about money with their kids, and those who do often miss the fundamentals.
"A lot of the basic stuff is overlooked by parents just because they assume that their kids know it, and they don't," says Janet Bodnar, the author of "Raising Money Smart Kids."
"Why would they? Unless you tell them, there is no reason they would know that your family insurance bill is going up by $1,000 a year just because they start to drive."
Before your kids the nest, boost their financial literacy with these 10 money-management lessons:
Balance a checkbook
Of the high school seniors surveyed, only 45% had a checking account, while 25% had no bank account. Once they leave home and set up accounts on their own, those without parental training often make costly mistakes. About 30% of college students said they had bounced a check.
As soon as a teenager starts earning money from a job, it's time to open a checking account, even if it's a joint account with a parent, says consumer adviser Clark Howard, the author of "Clark Smart Parents, Clark Smart Kids." Teach your teen how to write checks, use a register and reconcile the account with bank statements.
Mistakes will happen, so look for kid-friendly options, such as accounts that charge teens lower overdraft fees. And though Howard refers to them as "piece-of-trash fake Visas" on his radio show, debit cards are a good choice for teenagers, he concedes. Because there's a finite amount of money they can tap, debit cards are like training wheels for credit cards.
Budget money
More than a third of the college students surveyed had paid a credit card bill late, and though some just forgot to pay, others put off writing a check because they ran out of money.
Start teaching your kids how to budget their money as soon as they bring home their first paychecks. With no value judgments, sit down with your children and ask them what they plan to do with their money. Once you know their goals, whether it's buying a car or an iPod, you can talk about what they will need to do to get there.
"Priorities are good because you teach the concept of finiteness," Howard says. "There's only so much money."
Before your children go away to school, have them set up a budget for expenses. It will increase their awareness about money flows, incoming and outgoing. After graduation, show your children how to make a household budget. Using the starting salary of their chosen profession as a guide, have them calculate their after-tax income and then figure out how much they can afford to pay for the basics, such as rent, food, utilities, insurance and transportation, as well as vacations and entertainment.
Finance college
Don't forget to factor student loan payments into the monthly budget. Of the college students surveyed, two-thirds carry some student loan debt, with 70% of those students shouldering $10,000 or more. (See "An insider's guide to student loans.")
To keep your teens from getting in too deep, work the numbers together. Tell them how much you will kick in toward their college expenses, and then help them figure out a plan for covering the rest. If their answer is "student loans," Bankrate's calculator shows the true cost of a loan, which may help your children understand that this is not easy money. FinAid offers a more extensive set of calculators for student loans with varying terms.
Seeing that they'll be on the hook for $575 a month for 10 years if they take out $50,000 in loans may give your children an incentive to look for ways to cut costs. They might consider commuting or attending a state school. (See "How much college debt is too much?")
Establish credit
College loans make up only part of the debt load that students carry after graduation. Because two-thirds of college students surveyed have one or more credit cards and 83% got their first one by the end of their freshman year, it's easy to graduate owing thousands more.
"They hand them out like candy on college campuses," Howard says. "I look at it as part of the freshman-year survival kit: Don't flunk out, don't get arrested, and don't take on debt." (See "Confessions of a credit card pusher.")
Identify wants versus needs
Some teenagers think of credit cards as free money, so remind them that when they charge something, they're taking out a loan that must be repaid. They should use credit cards only to meet their needs, not their wants. Some 11% of high schoolers surveyed said it's OK to borrow against future income to go on vacation or buy sale-priced clothing. (See "Needs vs. wants? Listen closely to your elders.")
"Kids need to understand the many factors you consider when you make a financial decision," says Brette McWhorter Sember, the author of "The Everything Kids' Money Book."
"It just looks too easy to a child when you make the purchase. They don't see all the thinking you've done to get you to the point where you do whip out the plastic," Sember says. (See "Taking charge of your credit cards.")
Although Howard advises against freshmen or sophomores having credit cards, he does encourage college students to apply for two cards during their junior or senior year. "It's the only time in your life that someone will give you credit with no proof of income and no credit history," Howard says.
Deal with debt
Whether college students racked up debt buying pizza and beer or charging car repairs, a third of those surveyed had an outstanding balance of $1,000 or more on their credit cards, and half said they carried a balance some or all of the time.
Though paying the minimum looks like the easy way out, you might be surprised to learn the true cost of debt. It could take more than 20 years and more than $4,000 in interest to pay off a $3,000 credit card balance with an 18% interest rate if a debtor paid only the minimum.
"It's a real eye-opener," says Bodnar, who is also the author of Kiplinger's Money-Smart Kids column. "It does a lot more than even lecturing kids on credit, because they might forget the lecture, but they will remember this."
Pay taxes
Of the college students surveyed, only a third had prepared their own taxes, leaving the vast majority ignorant of the basics. A mere 39% knew that interest earned from a savings account is taxable, while fewer than half understood that when your salary doubles, your taxes also double, at least.
Starting with the first paycheck, sit down with teens and explain what's on the stub, showing them where their money goes. To estimate withholding on a higher salary, use the 25% rule: 10% for federal taxes, 10% for Social Security and Medicare, and 5% for state taxes.
When it's time to file a tax return, don't do it for them. Teach them the ins and outs of the system by making them an active part of the process, from tracking down receipts and W-2s to doing the calculations. (See "Your 15-point tax-return checklist.")
Consider all costs
For many teens, buying a car is their first major investment. But few understand the true cost of ownership, and they often leave expenses such as maintenance, repairs, gas and insurance out of their savings plans.
Even if you're planning to cover most of the costs so that they can focus on school (see "Should you buy your kid a car?"), break down all of the expenses, from how much the family's insurance premium increases when they're added to the policy as drivers to the cost of new tires. And make them responsible for paying a portion of the expenses, especially gas.
"It's a great budgeting tool," says Bodnar, whose son, a college student, has bought his own gas since high school. "It's an incentive for him to get his summer job, and it's an incentive to hold down the cost as much as he can."
While kids who rely on the family gas card don't blink twice when it costs $80 to fill up the tank, Bodnar's son is keenly aware of the price of a gallon, and he buys his gas from a station that offers a discount to people paying with cash.
Save for the future
Teens see the value in saving for a car, but few have the ability to see 30 years down the road. Although 80% of college students surveyed had savings accounts, most said they lacked adequate savings, with 60% saying they had slightly less or much less set aside than they should at this phase in life. Only 7% had any form of retirement account.
To motivate kids to save for the future, use a compound interest calculator to show them the "miracle of compounding," says Neale Godfrey, the author of "Money Doesn't Grow on Trees." "The miracle works to your detriment with debt but in your favor if you're saving money."
Once your teens start working, have them open Roth individual retirement accounts. As an added incentive, Howard matches his daughter's contributions dollar for dollar. To add even more diversity to the portfolio, Godfrey advises young adults to buy and hold stock in the companies that make the products they use every day.
Stretch a dollar
Even young children can learn the value of a dollar.
"Don't make money the biggest secret in the household," Godfrey says. "Get them engaged in the process."
Give young kids an allowance and make them responsible for some of their expenses so they learn how to set priorities and manage their money. Interactive Web sites like Kablinga specialize in teaching youngsters the value of money in a fun way. Teens with part-time jobs should pitch in, too, saving money for college or for senior-year expenses such as a prom outfit and a class ring.
When it's time for back-to-school shopping, set a realistic budget and involve your kids in the buying process. Teach them how to shop the sales and find deals on trendy clothes at consignment shops. If they come in under budget, let them keep 100% of the difference.
"Kids will spend unlimited amounts of money as long as it is yours," Bodnar says, "but when their money is on the line, it is a whole new ballgame."
This article was reported and written by Jennifer Maciejewski for Bankrate.com.