Teen Years: Credit
With credit-card offers coming as fast as keg party invites, college freshmen need some guidance.
The typical college freshman is burdened enough by scholarly responsibilities, homesickness, and self-doubt. To keep tomorrow's freshmen from suffering the additional angst brought by a first checking account, start them off sooner, as early as their junior year in high school.
Initially, keep it simple, avoiding frills and extras like overdraft protection; they need to experience the reality of bounced checks to understand record-keeping responsibilities.
Many college freshmen today have credit cards, and if your kid is to be one of them, then this, too, has a learning curve that is best experienced under your tutelage.
Before your kids acquire their credit cards, they'll need a lesson in how to use plastic responsibly. Point out that this is where most individuals' finances go seriously awry, and illustrate your point with interest tables that show the damage that 18 percent annual interest, compounded over the years, can do to their savings potential.
Also, tell them that credit is a privilege, not a right, and that if they abuse it, they will lose their ability to get more.
After setting up rigid criteria for the use of a credit card, start them off with training wheels in the form of a secured card - in which the holder charges only up to a cash account kept with the issuer.
This way, they become accustomed to using the card judiciously without getting in hock. If their purchases are sound enough, then move on to an ordinary credit card, encouraging them to pay the balance each month to avoid interest charges.
When your kids go out to make purchases on this card, they may be tempted by same-as-cash purchase offers, in which buyers of items like appliances are allowed to borrow interest-free as long as they pay off the balance within a set period (usually six months). Financial planners like Eleanor Blayney of McLean, Va., advise against using same-as-cash. "It disassociates the cost from the benefit," she says.
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Teen Years: Investing
After teaching your children the hard lessons, show them the rewards of self control.
Once your teenagers get a grip on credit, introduce them to the flip side: investing. After all, that's when they extend the credit and collect the interest.
Since your teens may have too much money collecting no interest in a checking account, the best way to start is with a money-market account on which they can write a few checks.
From there, introduce them to simple, set-term investments like savings bonds and certificates of deposit. Though returns from these will be meager in today's market, they serve an important lesson and will build their confidence about investing.
From there, introduce them to the stock market, but not as a prelude to picking stocks. Instead, advise them to get into some diversified mutual funds or a solid index fund.
Some of the stock investing games available on the Internet are a fun and educational way to introduce a teenager to stocks.
Once you get your child to understand the ups and downs of the stock market, you've probably accomplished all that you can reasonably hope for. Then, if he or she wants to put some money into individual stocks, set up a trust account for him or her with a discount broker.
Minors cannot legally trade on their own, but you can do it for them. Make sure you don't give up that password, though. This will ensure that the child consults with you before any trade is made.
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