How to Talk to Your Kids About the Financial Facts of Life
If you're a parent, here's a question that has probably crossed your mind: How do I teach my kids about money?
It's not a topic that's easy for most parents to tackle. Besides the awkward questions that your children will almost certainly ask -- How much money do you make? Are we rich? Are we poor? -- maybe you're not looking forward to confronting some of the financial mistakes you've made in the past, or continue to make now.
But taking the time to instill financial literacy in your children can help set them on the path to self-sufficiency, and ultimately, that is a gift only a parent can give. The advice below is meant to help you help your children to become dollar smart and investment savvy. Here’s a primer for teaching your kids the practical money skills they can draw on for a lifetime.
open a checking account in your child’s name.
Unfortunately, most banks won't allow a minor to set up a checking account. However, a few banks do allow a kid to be a signer on an account as long as a parent is a co-signer (federal laws prevent banks from pursuing minors for bounced checks, so they're going to require that the parent ultimately assumes responsibility). call around to find a bank in your area that offers an arrangement like this.
The most important lesson of the checking account is learning to balance income and expenses. This is a perfect way for your child to demonstrate living within her means, being responsible for her bills, and setting financial priorities. Encourage her to show you that she's mature enough to make some of her own financial decisions.
This is also the perfect time to show her the magic of online banking. Some banks will even text message account info to her cell phone -- how cool! And don't forget to explain that just because there are still checks in her checkbook, there isn't necessarily money in the account.
Buy stock in a company your child knows and loves.
Most people learn by doing. In this case, buying a few shares in a well-known company can open the door to an exciting new world.
Hand over the reins and let your child handle the details of stock ownership. Help her find companies that make products she's familiar with, such as video games, toys, comic books, movies, action figures, bicycles, restaurants – whatever strikes her fancy.
If she's not quite sure about this whole investing thing, or if she doesn't have enough saved up, you may need to loan her the money with the understanding that she needs to pay you back (perhaps this is a good time to introduce the concept of interest), or you could make the stock a birthday present or holiday gift.
Once she's engaged in the idea, you can begin explaining what makes something a good investment. Point out the difference between fads and long-term potential, and that it's usually best to choose a company based on its profitability, not its "cool factor." But at the same time, don't be afraid to let her make mistakes.
If the concept takes hold, demonstrate how to dig up and interpret information found on web sites, in newspapers and in financial statements. Investigating a company together can be like a treasure hunt or the plot of a mystery novel. Review some key concepts like profits and debt. But don't make it too heavy. Remember that this is about sparking an interest, not running a hedge fund.
Stoke the fires of sibling rivalry.
Nothing drums up interest like some friendly competition.
Using a free web site like Marketocracy.com, ask everyone in the family to create their own individual model portfolio. Set a start and end date for the competition (summer vacation seems like the perfect amount of time), and set some basic ground rules to help highlight important investing lessons like diversification (one company can't make up the majority of a portfolio). Once the particulars have been settled, start the virtual buying and selling!
Most importantly, don't forget to offer a prize to the winner. Maybe some real cash to invest in a real portfolio.
Teach your teens the cold hard facts about buying a used car.
A car is one of the most expensive items that anyone buys, regardless of age. As your teen approaches that magical time when it's finally legal for him to get in the driver's seat, first teach him the pricey truth about owning a set of wheels.
I've heard many, many adults refer to a car as an "asset." If you insist on doing so, at least refer to it as a "depreciating asset."
Impress upon your child that a car loses value over time, no matter how impressive the paint job or the rims. If he knows that for every $1 he pours into this precious vehicle, he'll be lucky to get $0.70 back when he goes to sell it, he may decide he wants to look for a better use for all that pizza-delivery money.
Unless you're going to help foot the bill, your teen will probably only be able to afford a used car. Before you hit the car lots, steer him toward the multitude of used car-buying guides available for free on the Internet. If he does most of the research, he'll have a better idea of the concept of "value."
Don't forget to walk him through the other expenses involved with owning a vehicle, namely, gas and insurance costs, even if he's not going to be responsible for paying them. Let him know that if he ends up in a fender-bender or if he gets a ticket, there will be some hefty financial repercussions from those actions.
Explain income taxes and deductions.
Admittedly, this isn't the most exciting topic for child or parent. But it will seem pretty important once your teen opens his first paycheck to see that Uncle Sam has absconded with a good chunk of change.
First, make sure that when your child starts working, he understands how to fill out his W-4. Point out that you already claim him as a deduction on your income tax return. Take heed: If he lists himself as a deduction on his own W-4, you’ll be paying his taxes next April.
As you can probably guess, anyone 16 or older with a part-time job generating regular pay will have income tax withheld. In 2010, a dependent child may earn as much as $5,700 in tax-free income. But to get back the money that was withheld, the child must file an income tax return.
If you can convince your teen to start saving for retirement, know that a child with earned income also can take a $5,000 IRA deduction, meaning he can earn up to $10,700 tax-free. Also, if you happen to own an unincorporated business, any of your children under the age of 18 will be exempt from FICA payroll taxes.
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