Older children (especially teenagers) may earn income from part-time jobs after school or on weekends. Particularly if this money supplements any allowance you give them, wages enable children to get a greater taste of financial independence.
Earned income from part-time jobs might be subject to withholdings for FICA and federal and/or state income taxes. Show your children how this takes a bite out their paychecks and reduces the amount they have left over for their own use.
Creating a balanced budget
With greater financial independence should come greater fiscal responsibility. Older children may have more expenses, and their extra income can be used to cover at least some of those expenses. To ensure that they’ll have enough to make ends meet, help them prepare a budget.
To develop a balanced budget, children should first list all their income. Next, they should list routine expenses, such as pizza with friends, money for movies, and (for older children) gas for the car. (Don’t include things you will pay for.) Finally, subtract the expenses from the income. If they’ll be in the black, you can encourage further saving or contributions to their favorite charity. If the results show that your children will be in the red, however, you’ll need to come up with a plan to address the shortfall.
To help children learn about budgeting:
- Devise a system for keeping track of what’s spent
- Categorize expenses as needs (unavoidable) and wants (can be cut)
- Suggest ways to increase income and/or reduce expenses
The future is now
Teenagers should be ready to focus on saving for larger goals (e.g., a new computer or a car) and longer-term goals (e.g., college, an apartment). And while bank accounts may still be the primary savings vehicles for them, you might also want to consider introducing your teenagers to the principles of investing.
To do this, open investment accounts for them. (If they’re minors, these must be custodial accounts.) Look for accounts that can be opened with low initial contributions at institutions that supply educational materials about basic investment terms and concepts.
Helping older children learn about topics such as risk tolerance, time horizons, market volatility, and asset diversification may predispose them to take charge of their financial future.
Should you give the kid credit?
If older children (especially those about to go off to college) are responsible, consider getting them a credit card. Most major credit card companies require an adult to cosign a credit card agreement before they will issue a card to someone under the age of 18 (as of February 2010, the Credit CARD Act of 2009 will generally require this for consumers under age 21). Ask the credit card company for a low credit limit (e.g., $300) or a secured card. This can help children learn to manage credit without getting into serious debt.
- Set limits on the card’s use
- Make sure children understand the grace period, fee structure, and how interest accrues on the unpaid balance
- Agree on how the bill will be paid, and what will happen if the bill goes unpaid
- Make sure children understand how long it takes to pay off a credit card balance if they only make minimum payments
If putting a credit card in your child’s hands is a scary thought, you may want to start off with a prepaid spending card. A prepaid spending card looks like a credit card, but functions more like a prepaid phone card. The card can be loaded with a predetermined amount that you specify, and generally may be used anywhere credit cards are accepted. Purchases are deducted from the card’s balance, and you can transfer more money to the card’s balance whenever necessary. Although there may be some fees associated with the card, no debt or interest charges accrue; children can only spend what’s loaded onto the card.
One thing you might especially like about prepaid spending cards is that they allow children to gradually get the hang of using credit responsibly. Because you can access the account information online or over the phone, you can monitor the spending habits of your children. If need be, you can then sit down with them and discuss their spending behavior and money management skills.
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