By Phil Kim, AXA Advisors Southwest
Just a few weeks ago, the parents in this community looked on with such pride as the Class of 2014 donned their caps and gowns and celebrated graduation. Among them were the National Merit Scholars, college-bound athletes and recipients of full-ride scholarships.
But if entering the real world without one important lesson, even the most accomplished of students could be graduating into financial ruin: the lesson of financial literacy.
Having “The Talk.
There is only one issue with ensuring this lesson sticks with our kids—us.
Aside from the birds and the bees talk, the money talk is probably the most uncomfortable for parents, especially if we aren’t completely comfortable with our own level of expertise on it, or if we grew up in a household where it was considered crude to discuss finances with anyone, children included.
But it really needn’t be that dramatic.
By understanding and then talking to your children about two simple concepts, you can potentially save them (and you) from a lifetime of money misery.
Concept One – Where does money come from?
Turns out, money neither grows on trees nor out of parents’ wallets. And not all money is meant to be for “fun” at the movies, for downloading iTunes or taking road trips every weekend.
But how do you get a kid to understand this?
Why not focus on a “money in, money out” budget with them? Often, children focus only on money going out. But where does it go? And when? And why? A budget, reviewed with and by a parent each month, can be an easy way to show the value of money on a regular basis.
For example, if a child gets a $40 allowance each month, have them develop a budget to make that money last for an entire month. This means saying “no” to spending all the “fun” money at once. It also helps children understand how to prioritize.
Concept Two – Credit cards are supposed to be paid back?
YES! Believe it or not, we actually recommend working with children on building credit at a young age, but only if they can do so without maxing out on their available balance, straining to make payments or, worse, defaulting. This is an especially important lesson to instill before college.
Credit card companies generally offer low limits to young adults entering college. Some offer incentives to apply. Many companies simply place applications on college desks and in dorms—and freshmen apply by the thousands, sometimes not fully realizing that every penny spent on that credit card is owed back, with interest.
By working with children on credit starting from a young age, parents can help them grow to understand the impact of good or bad credit on one’s life. In addition, just as bad spending is habit forming, so are good spending and saving.
Phil Kim is vice president of AXA Advisors Southwest in the Scottsdale Airpark and director of its Retirement Benefits Group. He also helps oversee the AXA Achievers Scholarship program across the state.