Teach Your Child A Valuable Financial Lesson

Teach your child a valuable financial lesson

Soon our children will be starting summer jobs, graduating from high school, preparing to leave for college or graduating from college and entering the workforce at one of the most turbulent economic times. Take the time to teach them a few lessons in financial responsibility.

A summer or first job

If you have a child who will be earning a living this summer for the first time, discuss the amount of money they will make over the summer or at their new job annually. Review their weekly or bi-weekly gross income, the effect of payroll taxes and their net take-home pay. Discuss their financial goals and create a budget for their plans to spend and save their earnings wisely.

Take them to a bank and open a checking and/or savings account. Teach them to direct deposit their paycheck or deposit a set amount each pay into their checking account. If you want to teach them how to write a check and record the expenses in a check register so they have a life long skill, now is the time. You many not want them to have easy access to their funds, so explain how a debit card works. But most importantly, when the statement arrives, teach them to reconcile their bank checking account. Just because they have checks in their checkbook does not mean they will have money in their account, a common misconception. You should also explain what bouncing checks means and that is can be costly.

You should also teach your child to make saving a priority and feed the piggy bank. They should set a savings goal and plan to save a fixed amount each pay to reach their goal. Educate your child about the concept of interest bearing accounts that help you earn interest on your money. Discuss the benefits of contributing to a 401(k) retirement plan with their employer or an individual retirement account if they are eligible to contribute. Help them through the process of opening a 401(k) or IRA, determining their risk tolerance, making contributions and investment selections and review their first statements.

College cash and credit

Your child should be readied for college with all the necessary dorm supplies, a cell phone and good money management skills or Finance 101. Have a plan for which college expenses you will pay and the amount your child will cover with the money they’ve saved from their job or graduation money. Monthly payments to your child work better than a lump sum at the start of a semester. There are so many opportunities to spend money in college, campus entertainment, meals not covered by meal plan like late night pizza, personal care expenses, the freedom of no parental oversight, etc. But each college student should prepare a budget of their income and expenses and plan to live within the income provided by their parents or guardian, the pay they bring home or their savings. Living within a budget is a life skill with choices to either increase income or reduce spending.

It is usually a good idea to open a checking account with a bank in the college area or if your bank has a branch location in the area, it is an additional consideration. And discuss ATM fees if any that they will pay to have access to their funds.

Beware of credit cards which are an invitation to overspend for most college students. If you child does apply for a credit card, discuss with them the amount they can expect to charge and repay each month. While having a credit card provides an opportunity to build a credit history, your child needs to understand the repayment terms, the interest charges and the late fees than can be assessed if they do not pay their balance in full or on time each month. They also need to understand how their credit history could be jeopardized.

Taxes and Filing a Return

Now is a also good time to explain to your child the impact of taxes on earned and unearned income, paying taxes and the responsibility to file a tax return, if required.

The bottom line: Take action now to teach your child or seek a trusted advisor to teach your child about money management in each of life’s stages. For more information, visit www.360financialliteracy.org or www.feedthepig.org.

Jacquelyn M. Basso, CPA, Downingtown, PA is Chairperson of the PICPA Personal Financial Planning Committee. She can be reached at (610)594-9400 or www.bassocpa.com