How to Talk to Your Grown Kids About Budgeting and Credit
Your kids need your help starting a budget and beginning their credit journey.
Giving your child a solid understanding finances is like teaching a man to fish.
- Talk to your kids early about money in all its forms, like banking, borrowing, and budgeting.
- Americans owe almost $1 trillion in credit card debt. It’s vital to credit health to learn how to use credit responsibly.
- Budgets are fluid — they can and should be updated as often as necessary.
Building your credit doesn’t have to start when you buy a car or home. Teenagers and college-aged adults can get a head start by taking small steps to establish credit without taking too much risk by getting a budget in order. Here’s how to do it.
Start money talks early
Before you take a deep dive into credit, review basic money fundamentals with your child first. There’s a chance your kid doesn’t know much about these and may need a few lessons. Here are some initial topics to cover.
- Bank accounts: Checking and savings accounts are a great place to start. These are accounts where funds come in and go out. Also, mention how to use a debit card. At this point, you might talk about a negative balance and how you can’t spend more than you have. Discuss bank fees that come with overdrafts or insufficient funds.
- Paychecks: If your child works, explain to them what each figure on their paystub. Talk to them about different taxes, how many hours they worked, and their hourly rate, if it applies. This ties into the bank account talk, too.
- Borrowing: You can mention credit cards here, but you can also talk about auto loans, home loans, and even student loans — because it all adds up. Explain that if you don’t have enough money to make a big purchase right now, you can get it financed through a loan, but those come with interest rates—address payment terms and fees as well.
- Organizing: You can do a broad overview of how to organize finances through checking bank statements, using auto-pay, and setting up a budget on a spreadsheet or app.
Diving deep into credit cards and debt
It’s important to stress how to use credit cards effectively because the downsides are severe. A WalletHub survey finds the average household credit card debt load is more than $8,000.
Firstly, explain the good of credit cards and why they’re helpful. For instance, they can help you build your credit history, and you can earn rewards and cash back with some. But also explain the downsides. Here’s where your own experience with credit and debt — and that of their grandparents — can come into play.
Credit cards have some of the highest interest rates of any financial product — averaging more than 20 percent. To compare, home mortgage rates some of the lowest rates, ranging from 3% to 8%. Interest rates come when you carry a balance from month to month; the higher your balance, the higher your interest payment. A higher balance can also cause your credit score to go down. A high credit utilization — or how much credit you’re using versus how much credit you have in total — shows creditors you’re not a responsible credit user. Lenders look at your score as an indicator of if you’re worth lending to, so a low score means you’ll have a hard time borrowing in the future.
Many credit card companies will give you a minimum amount due each month, but that doesn’t mean you should only pay that amount. The best way to use credit cards is to pay them off in full at the end of the pay period. It’s kind of like having an interest-free loan for a few weeks.
Credit cards are great when you get to cash in on the rewards. Some companies give you a certain percentage back when you shop at grocery stores, gas stations, and restaurants. Others will provide you with points when you book flights, hotel stays, or use rental cars. Points and rewards are great but won’t get rid of an interest rate. That’s why you should pay off your cards in full at the end of the pay period.
You can help your kid build up their credit without much work by adding them as an authorized user on one of your cards. This way, they can reap the benefits of your responsible credit behavior. They’ll get a card of their own, but they don’t have to use it. You can even hold on to it if you prefer.
If you don’t have great credit or don’t want them on your account, you can help them find a credit card that accepts users with low to no credit. There’s a chance they’ll need to use a secured credit card to get started.
If you’re worried about your child over-using credit cards and falling into debt, advise them to start by setting up a recurring payment that covers small expenses, like when you get gas. Then, the card is paid in full by the monthly due date. When they get more comfortable, they can add more purchases, but it’s important to continue paying off the card without adding interest. Remind them; if they can’t afford to pay off the balance when payment is due, they should skip the purchase.
Help them set up a budget
The FirstlySM app allows you and your family to collaborate on setting up and maintaining a budget together. If apps aren’t your thing or you want to start your child out with something simple, try using a spreadsheet. Setting up a Google Spreadsheet is easy, and you both can add and make changes as you see fit. List out all of their monthly expenses, including:
- Home payment
- Car loan
- Auto insurance
- Student loan
- Phone bill
- Credit cards
- Electric bill
- Entertainment, like streaming services
- Childcare or preschool
- Clothing, accessories, or other miscellaneous items
Every person and household is different, so each budget is different. Use templates as a guide, not necessarily as a hard-and-fast rule. This list isn’t concrete, and not everyone will have the same expenses.
A budget is a fluid document, and there’s a good chance you’ll make many updates and changes to it, especially early on in its creation. That isn’t a bad thing. A budget is there to help make sure you don’t spend more than you earn. The sooner your child embraces one, the better.
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About the Author
Dori Zinn has been covering personal finance for more than a decade. Her work as been featured in The New York Times, Forbes, Yahoo!, CNET, and more. She covers credit, debt, budgeting, investing, college affordability and other topics to help people learn about money.