As kids move through the teen years and into young adulthood, it's important that they learn money management skills. Here are a few ideas on how you can help them.
Share your own experiences—your mistakes as well as your successes—to help shape the conversation
Give your older teens real opportunities to prioritize needs versus wants
Right behind the “facts of life” talk, the “money talk” is one many parents have trouble approaching with their offspring. You might worry you’ll sound like you’re lecturing, or that you’ll bore your kids. Or maybe you’ve made mistakes with money yourself and don’t feel like an expert on the matter. Even so, as your kids move through high school and into young adulthood, they need to learn basic money management skills to help them become financially responsible. But how to start?
“You want to keep it simple,” said Robert Siuty, senior financial consultant at TD Ameritrade. “Don’t over-complicate the conversation, because if you do, it can cause them to get bored and lose interest. If you have basic conversations and frequent conversations periodically, they can learn little by little the types of pitfalls and things to avoid and be more mindful about financial issues.”
Here are a few topics to explore with the teens and young adults in your life. Each example is followed by an action plan to help you get the conversation started. Remember: the goal is to have two-way, non-judgmental conversation, free of lectures or monologues.
One of the best ways to help teens grow into financially savvy young adults is to share your own experiences.
“Talk to your kids about the mistakes you’ve made,” Siuty said. “That’s huge. Life is about learning. Just as my parents tried to explain to me the mistakes they made so I can avoid them, I try to explain my mistakes to my kids so they can learn. It’s good to show your kids that it’s OK to fail once in a while, as long as you learn from those mistakes.”
CONVERSATION STARTER #1: INVESTMENT MISTAKE. Did you ever buy a stock on a “hot tip" from a friend or relative that turned out to be a poor performer? You likely learned from your mistake, so why not pass it on?
ACTION PLAN: If you have an investment that went the wrong way, don’t hide it from your kids. Explain your thought process leading into that decision and why it turned out to be wrongheaded. If they seem interested in learning more, you can use the moment to discuss prudent investing and money management strategies such as:
Perhaps equally as important as sharing your mistakes is sharing your successes.
CONVERSATION STARTER #2: RUNNING A HOUSEHOLD. When it comes to budgeting, do you run a tight ship? Have you diligently paid down your mortgage and other household debt? It’s quite likely the young adults in your life have no idea what it takes to run a household.
ACTION PLAN: When you sit down to pay the bills, include your kids. Open up the bank statement and show them where the money comes from (i.e., your income sources—W-2, investment income, etc.) and where it goes (taxes, mortgage, utilities, clothing, transportation, and saving toward your goals).
You can remind them that budgeting is all about priorities, separating the things you need from the things you want, and perhaps making sacrifices in order get the things you truly want. This can not only put them on the right path when it becomes their turn to make these types of choices, but they also may come away with a fuller appreciation for how you run the household.
CONVERSATION STARTER #3: A BIG HOUSEHOLD PURCHASE. Big-ticket items such as a home remodel, new car, or once-in-a-lifetime vacation can be expensive, and they typically affect everyone in the household. So why not involve the entire family in the decision?
ACTION PLAN: When it’s time to buy, for example, a new car, begin with a family discussion about what’s needed (size, capacity, hauling capability) versus what’s wanted (luxury amenities, a favored style). Should the family splurge, even if it means dialing back a planned trip over spring break?
Once kids get their first part-time job, consider shifting some of their monthly bills, such as gas, clothing, or a music subscription. It might stir them to begin prioritizing. “Will I really wear that?" “Am I getting my money’s worth out of that subscription?" “My favorite singer is coming to town in three months, but tickets are over $100 apiece. What can I cut from my budget?" When it comes down to it, it’s the same decision-making process at work.
Establishing a clear difference between needs and wants will grow in importance as teens approach college. And it begins well in advance of freshman year.
CONVERSATION STARTER #4: ESTABLISHING THE COLLEGE BUDGET. There’s nothing wrong with pursuing a “dream school," but what are the qualifying criteria? Wouldn’t it be great if “value" were included in the list?
ACTION PLAN: If you’ve set up a college savings plan, you could pull up the account online and explain the different sections, including fees, performance, and asset allocation. Show them the rest of the funds you will have available for them. Then compare it to the cost of attendance (tuition, fees, room and board, minus any need-based or merit-based aid and scholarships) at the colleges and universities your teen is considering. The rest of the money will need to come from somewhere, be it student loans, private borrowing, work-study programs, or other sources.
Have a frank discussion about finances and the potential burden of excessive student loans. If you’ve successfully addressed any of the examples above, you might be able to demonstrate how starting post-college life under a mountain of debt can be a serious impediment to pursuing their life goals.
Even if you’re able to foot the bill, or your child gets a full-ride scholarship, it might be a good idea—perhaps over dinner when they’re back home—to show them the latest college bill and discuss what sort of costs go into it.
The tone and content of the financial talk changes as kids go from teens to college kids to young adults. When they’re younger, it’s often about establishing habits—seeking out and taking advantage of those “teachable moments." When they finish their studies and begin to leave the nest, the conversation will be less about generalities and more about actionable specifics.
CONVERSATION STARTER #5: THE REAL-WORLD TRANSITION. Just as you went over your household budget when they were younger, now it’s time to help with theirs. Again, remember to find a middle ground between doing it for them and being too hands-off.
ACTION PLAN: Start with their salary, net after taxes, and work your way down—medical insurance, renters’ insurance, student loans, food, and utilities. Given the mandatory expenses, how much can they spend on rent? Does the company have a 401(k) or other retirement plan with a company match? If so, ask them to consider contributing at least to the limit of the matched contribution. Do they have a car, and if so, is it needed?
Also, young adulthood is the time to start establishing good credit. Request a credit report, and take out a low-limit credit card. Make a few purchases and pay them off at the end of the month. Show kids how paying bills on time will help them to not only sidestep steep late penalties, but also can help bump their credit score over time, which will become important when they apply for a mortgage or auto loan. If you’re comfortable, share your credit report with them and talk about any decisions you once made with credit that worked out well or badly.
Although the financial talk can seem daunting at first, it will get easier the more you do it. Some experts recommend discussing finances at least once a year, and the sooner you start, the better for both you and the young adults in your life. Besides, having “the talk" can be mutually beneficial. It might help clear anxieties on both sides, bring you closer together, and, over time, you might even start learning from the kiddos. Ongoing conversations can go a long way toward building good financial habits so the young adults in your life can achieve financial independence.
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