It’s every parent's dream that her child be more financially successful than she is.
But, these days, a lot of kids aren't confident this will happen. Consider these stats: In 2011, 89% of teens ages 14-18 said they thought they would be as financially well-off or better than their parents, according to a survey by Junior Achievement and The Allstate Foundation. In 2012, only 56% of teens thought so.
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The pessimism didn’t end there. In 2011, 44% of teens thought they would be financially independent by age 20. A year later, the majority say they don’t think they’ll be able to do it all on their own until somewhere between 21 and 24, and 23% percent said they would become independent sometime between the ages of 25 and 27.
While the survey didn’t explore why teens are feeling less optimistic, if the findings are to be believed, it's clear that many think they will be relying on The Bank of Mom and Dad well into adulthood.
How can you prepare your child so that when it's time for her to take charge of her own finances, she's ready and able to succeed?
We asked LearnVest Financial Planner Sophia Bera, CFP®, for answers.
7 Steps to Setting Them Free
First, know that it isn't easy: According to another survey, more than 60% of young adults aged 19-22 receive financial help from parents, and 59% of parents still provide help to children between 19-39. If you're in that boat, you're not alone.
But there are ways to set your child up for early financial success from the beginning. “It’s important to begin talking to kids at a young age, so that by the time they’re teenagers, they have some basic financial skills down,” says Bera. For example, teens should have their own checking and savings accounts, they should know about responsible spending, creating and sticking to a budget, and how (and why) to save for the future.
These seven steps will help prepare your child to not just leave the nest, but take flight!
1. Start early.
“Allowances should be tied to an increasing number of financial responsibilities from an early age,” says Jayne Pearl, co-author of "Kids, Wealth and Consequences: Ensuring a Responsible Financial Future for the Next Generation." For example, your child’s allowance may be enough for him to purchase his school lunch a few days of the week, buy a small toy he wants and put a little money into savings. “This way, kids will get used to stretching their allowance to cover their share of expenses and learn how to save up for other things they want,” she says.
2. Teach them the power of earning.
Allowing your child to do extra chores, babysit or start a lemonade stand or other business venture for more spending money is a great way to show kids that money is earned and not given freely. (If your kid needs a little push figuring out how to get a job, these six steps can help.)
3. Increase their responsibilities.
As your child gets older, add new financial responsibilities that make sense for her age and maturity level. For example, preteens can be responsible for purchasing things they want or need for hobbies, like art supplies or guitar picks. Young teens may be in charge of clothing and hygiene purchases. Your older teen may be responsible for paying his cell phone bill (more on that topic here), auto insurance or prom expenses. The key is to gradually increase what your child is responsible for, with the goal that eventually he will be supporting himself. An increase in his allowance, or a part-time job as kids get older, can help them cover the additional expenses.
4. Use yourself as an example.
Let your teen see how you handle your share of the family’s finances–whether selecting car insurance, negotiating a lower interest rate on your credit card, reviewing and paying the utility bills, etc. Many parents talk to their kids about money, yet don’t show their children through examples, says Bera. When children see the financial happenings in action, they’re more likely to pay attention and learn from it.
5. Embrace their money boo-boos.
Your child is bound to mess up in her first financial dealings. Those mistakes are actually a good thing. “Making and learning from financial mistakes at a young age is really important,” says Bera, our financial planner. “It’s a lot easier to fix a $200 mistake while the teen is younger than it is to fix a $2,000 mistake once they’re in college, or a $20,000 mistake in their 30s,” she explains. When your child does mess up, resist the urge to jump in and fix things. If you do, she won’t learn from the mistake because she’ll feel she can always rely on good ol’ mom to take care of things.
6. But learn from the mistakes.
Although you shouldn’t save your child every time she makes a financial flub, you should use those as teachable moments. Discuss what happened, then work together to come up with a way to avoid repeating it. For example, teaching your child how to request an extension on a bill or explain a late payment to a creditor can be the difference between her working out solutions to future financial missteps and ignoring the growing pile of bills or calls from debt collectors.
7. Advance beyond the basics.
Once your child is old enough to work and drive, she needs more financial knowledge. Teach her how to decipher her paycheck, like the difference between gross and net income and what the different deductions mean (and why they’re there). Also teach her how credit works, how to make bigger purchases (like a used car) and the importance of auto insurance (and how it works). As she approaches high school graduation, include lessons about student loan debt, reducing college costs, the importance of her credit score and basics on investing (we cover all those topics and more in our Knowledge Center).
When a Kid Just Won't Leave The Nest ...
Sometimes, no matter how hard a parent tries, a kid just isn’t ready (or refuses) to be independent (Think back to that 23% of kids above who said they will need help from their parents up until age 27.)
If your child is post-college-age and living at home—a common situation these days—there may come a time for tough love. First, don't feel guilty if you're allowing your child to build a cushion before sending him out on his own. Many parents make the mistake of pushing their young adults to be financially self-sufficient as soon as they get a job, says Pearl, but there's no harm in giving it more time.
Consider letting your child live at home for a defined amount of time, so he can build up a financial cushion to cover unexpected expenses that crop up. The cushion will help him deal with the issue without having to return home or hit you up for a loan.
Then, once he has a job, give him a certain amount of time to continue to live with you, but have him contribute in the form of rent, cooking, cleaning and other household chores so that he doesn’t get a free ride.
As the date of his independence approaches, remind him every month or two (so he doesn’t “forget”). Then, cut the financial cord. It’s difficult, but forcing your child to be financially independent will be better for him in the long run. Don’t worry. Once he gets that first taste of freedom and the enjoyment of taking care of himself (without having to worry about parents breathing down his back), he’ll thank you!