According to a December 13, 2022, report by Urban Institute, "What Can Policymakers Do to Help Young Adults Cope with Debt?" 20% of young adults in the US aged 18 to 24 have debt in collections. Debt at this stage of young adults' lives can be especially difficult to manage not only because of their lack of experience but also due to limited incomes and higher interest rates.
We asked local financial expert, Ryan Merchant, to share some advice. Ryan says, "In the days of our youth we think we have all the time in the world; yet as adults, we realize how quickly time passes. Understanding that time is the most precious commodity a young person has, is a valuable lesson that will primarily impact their future when it comes to investing. The advantage of time and saving money consistently is a very powerful combination."
Ryan adds that "With students, I like to share the scenario about a young person who is offered a difficult job, working long hard hours every day for a month. The starting pay is only 1 cent a day, but then the pay is doubled every day for 30 days. Most of the time when I ask students if they would want to do this job, they reply with a resounding no. However, after one month of getting paid a penny a day and doubling it every day for a month, the hard work would have produced over $5 million dollars."
The younger set
Begin teaching your child the concept of money, including the values of coins, from the ages of 4 to 6. During this time, keep it simple. Allow your child to earn money to save in a piggy bank for small chores.
It’s all elementary
By the time your child is 7, an allowance is essential to learning about money and developing good habits. Familiarize your kids with banking. Open a savings account, so they can watch their money grow. Also, help them set achievable goals, such as saving for a new toy or putting away for holiday gifts.
Keep in mind, many banks charge service fees unless a minimum balance is kept, and frequent trips to the bank may be impossible. As an alternative, set up your own 'family bank.' Give your child a spare checkbook ledger or savings passbook. Then copy blank savings deposit and withdrawal slips from your bank for your kids to use. Require them to fill out the slips and log transactions in the ledger. Also, give your kids monthly interest for their savings so they can experience the immediate reward of saving money.
The teen scene
Designer clothing, entertainment, and car expenses are the most significant areas of teen spending. Some teens also put away for college. But few are prepared for the adult world. That's because most teens aren't primed for the responsibility of paying for food, housing, and health care costs.
Those teens involved with the family budget and who contribute to family expenses learn a valuable lesson. Opting to show teens the spending categories in which they have a direct impact on family expenses is helpful. Also, agree on a reasonable amount in which your teens can contribute to help cover those expenses. It'll go a long way toward preparing adolescents for adulthood.
Whether teens contribute or not, their working hours should be limited to no more than 10 to 15 per week. According to Cobb, researchers have found adolescents who work, especially 20 or more hours per week, are not as engaged in school as their nonworking peers. Based on various studies, this shortchanges students in the long-term. If you restrict your teens' working hours to ensure success in school, it's good to provide an increased allowance for clothing and personal needs. You can then help your teens to budget their money.
Still, there are many ways teens can learn the value of money and develop good habits. In fact, limiting teens' funds may force them to be more selective and make wiser financial decisions.
Tips your kids can bank on
Help your child develop good saving and spending habits in the following ways.
Allow your kids to make some of their own spending decisions. Place reasonable limits. Then offer appropriate guidance while giving your kids opportunities to learn from their mistakes.
Don't loan your kids money every time they want it. But do offer occasional opportunities for them to learn the costs of borrowing and the experience of repaying the loan. When contemplating whether to give your child a loan and how much, there are several considerations. What's the purpose of the loan and their ability to repay the loan within a reasonable time?
Teach your child how to set financial goals. By the teen years, these may include those big-ticket items just mentioned. And don't overlook the importance of short-term goals, which offer your kids a feeling of accomplishment and a boost in self-esteem.
Don't be totally secretive about family finances. Kids have few opportunities to see and experience the financial side of the adult world. This doesn't mean you need, or even should, disclose everything. But it's easier for kids to understand if they can see it in concrete terms. Develop a detailed household budget. Then explain it so your adolescent can see how your family spends and why.
Merchant recommends, "At any age, a person set aside what they can afford every month and make it a habit. Even if it is a small amount of money, with the right amount of time and good investing you can benefit greatly."
Ryan Merchant is a Financial Advisor working at LPL Financial LLC in Celina. He has over 23 years of experience in the finance industry.
903.267.9317
Ryan.Merchant@LPL.com