Making the Transition
Everyone was a teenager once, and we can all identify to some extent with the problems these youngsters face transitioning into financial adulthood. The change from having someone as your primary care giver, providing food, housing, all your needs, to learning to do this on your own is difficult.
As parents you naturally want to see your children succeed in life, but you may not always know what advice may help or hurt their situation. While every child and every family’s circumstances are unique, these are some no-fail tips to get your child on path to financial responsibility.
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Where to Start: The Bank
The first and most important step towards financial independence for your teenager is a savings and checking account. If you are pleased with your current bank, take them there and open them an account in their own name. For added peace of mind you may wish to add your name as a signatory on the account. This will enable you to monitor the account, and make it easier to deposit money should you wish to. Most banks and credit unions offer first time customers and students special low-priced banking options. They are usually called student or starter accounts. Make sure your child fully understands how their account functions and operates. One important lesson they must learn is the danger of over-drafting and the costly penalties this can incur.
The Benefits of Saving
It can be difficult to make teenagers understand the benefits to saving money. It is natural for them to want to spend money on things they would like to buy, as soon as they get money in their hands. A good rule to teach your children regarding savings vs. spending is the Rule 72 method for saving money. The rule is simple and shows how easily a little saved money can grow over time. Take any amount; say $1000 invested in an account that yields 8% interest. Divide 72 by 8 (the interest amount earned) and the about you get is 9. This 9 represents how many years it will take for your money to double. In this example, in 9 years at 8% interest compounded annually, you will have $2,000, without having to anything.
Building Some Credit
It is of paramount importance that your child starts building a positive credit history as soon as possible. A key ingredient to a healthy credit score is the length of reporting history. If your child were to start to build a credit history at age 16, at age 26 they would already have 10 years built up on their FICO score. The best way to get your child started with credit building is to get them a credit card in their own name. Make sure the spending limit is low, maybe as low as $250, just to keep them from incurring too much debt. If your child is unable to secure a regular unsecured credit card, or student card, look into secured credit card options. Secured cards build your credit the same as unsecured cards do. The difference is anyone can qualify for a secured credit card. This is because secured cards are backed by a deposit you make equal to the spending limit, making you a no-risk borrower for the lending institution. Usually after a year or so with a secured card, the lending institution will offer a regular unsecured card. Be careful to always maintain control over your child’s spending limit increases when offered and do not let them get themselves into the number one mistake of youth: credit card debt.
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Warning Them About the Dangers of Fraud and Predatory Lending
One final an important lesson to explain to your teenagers is to be wise to the dangers of fraud and predatory lenders. Sadly, many predatory lenders take advantage of young people because with their lack of experience in financial dealings, they make for easy prey. Let your children in on the facts of payday loans and how to avoid the temptation of quick cash. Payday loans are often a difficult borrowing cycle to break. Payday loans are where borrowers pay obscene amounts of money in interest, just to have access to some quick cash. Also they need to be aware of high-interest loans and hidden fees built into borrowing contracts.
Let them know that you will be there to read any contract for them in order to look for these scams, before they make the mistake of signing. Finally, with good credit the incessant offers from credit card companies looking to bury your child in debt will eventually come. Your children need to understand that debt and credit mistakes will stay with them through adulthood. Learning at a young age to balance your income to spending ratio and knowing to avoid the temptation of buying too much on credit, will help you become an adult with good financial standing.
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