Minor investments

December 2016 View more

Managing money at a young age

Most parents want to provide everything possible for their children, from everyday expenses such as clothes and food to a life-changing investment in a four-year college. However, parents need to make sure young adults aren’t so sheltered that they can’t handle credit cards, loan payments and daily living expenses when they’re on their own after graduation.

Brad Neubauer, who teaches business classes at Naperville Central High School, said it’s important for students to realize their first full-time job will likely pay much less than what their parents make right now. “Most of my students in Naperville are living a very upper-middle-class lifestyle,” and might expect that same standard of living at twenty-two years old, he said. “But they won’t make as much as their parents for maybe ten to fifteen years.” Young adults need to have realistic expectations about “spending habits, knowing their limits and how much money they are bringing in as compared to what’s going out,” he said.

One way teens can learn the basics of money management is through consumer-education courses in high school. For almost fifty years, the state of Illinois has required students to take a high school course that focuses on financial literacy, which Neubauer teaches for juniors and seniors at Central. His counterpart at Naperville North is Jason Reid.

Reid helps students think about real-world financial decisions through an exercise called the Budget Challenge. “Students are thrown into a simulation where they are given different financial disasters or everyday financial life events,” he said. “They need to react and adjust their budget, make sure they’re still paying bills on time, avoiding late fees. Students often say it’s not hard, it’s just detailed.”

Here are some ideas on how parents can use a similar approach with their children:

Talk about paying for college

Parents should start a college fund when the child is at a young age, and talk to students about costs by freshman year of high school, Neubauer said. In class, he makes sure students understand the effect student loans will have on their post-college life. “A lot of kids don’t realize how much it’s going to cost for college, take a loan out, and have to pay it back regardless of whether they graduate or not.”

Discuss everyday costs

“I’m a big believer in letting them know how much things cost,” Reid said. For example, when families go out to eat, parents can talk to children about how all of the entrees and beverages add up to a final bill, plus a tip.

Encourage them to work

Children can start earning money for basic chores at home or for relatives or neighbors, allowing them to learn money management—such as saving vs. spending—at a young age. Once teens start making decent money at a part-time job, they should start investing, Reid said. “If you have any type of earned income you should consider opening an IRA, because time is on your side. Compound interest works wonders.”

Be careful with credit cards

Both teachers encourage high school students to have both savings and checking accounts. Credit cards can wait until students understand budgets and the necessity to pay off their credit card bills right away to avoid high interest rates and build their credit rating.

Be transparent

Parents don’t have to share everything, but it’s a good idea for them to help their children understand how they make ends meet. “Don’t paint a bleak picture, but have some transparency so they know the facts,” Reid said.