Parents serve many roles for their children: nurturer, teacher, mentor -- and inevitably, a child’s first ATM.
Most parents give their tweens and teens money in some way: cash as needed, an allowance or maybe access to a credit card. But simply dispensing funds is a less-than-ideal way to teach personal financial responsibility.
And American kids need some help in that department. One in 5 U.S. teenage students lack basic financial literacy skills, according to results released last week by the Program for International Student Assessment (PISA). Among the 15 participating countries, the U.S. ranked 7th in how well 15-year-olds understood essential financial concepts and risks.
The scores remained unchanged since 2012, the first time PISA tested financial literacy. Only 1 in 10 American students achieved the highest proficiency level, meaning they are able to make the kinds of financial decisions relevant to them in the future. Chinese students ranked first overall.
With the average college graduate facing more than $35,000 in student loan debt, an array of credit card options, complicated cellphone plans and an ever-changing housing market, teens need solid financial planning skills before they launch into adulthood.
There was a key indicator that correlated with better performance on the PISA test: 53 percent of the participants said they have a bank account. Students with a bank account scored 42 points higher on the financial literacy exam than students who did not have one.
“Parents are the number-one influence on their children when it comes to money,” said Billy Hensley, senior director of education for the National Endowment for Financial Education. Besides setting up an account that a child can access and manage, there are other important money-management tips for parents to teach children before they head off to college:
1. Explain how college debt and interest work. Give examples of what monthly loan repayments could look like and how many years it would take. If a high schooler is deciding between college options with significantly different debt loads, explain to them the salary range required after graduation for them to comfortably make the loan payments.
2. Show them the dangers of credit card spending using real-life examples. Calculate how much they would pay in interest if they only paid a minimum monthly amount and carried a balance, and what the long-term consequences of bad credit can be.
3. Share your own financial mistakes. Be honest about your own financial setbacks and the better choices you wish you had made.
4. Make a plan. Anthony ONeal, co-author of “The Graduate Survival Guide: 5 Mistakes You Can’t Afford to Make in College,” says students need to have two written plans before heading off to college: a plan for their life and a plan for their money. Begin by setting personal goals for the semester and making sure those align with their budget. He advises revisiting and revising each plan at the start of each semester.
5. Create an emergency fund. ONeal also suggests college students save and keep a $500 emergency fund. (Not for late-night pizza “emergencies,” but the broken-down-car type of emergency.)
Some companies, recognizing that cash usage is declining and that teens need to learn digital money management, are jumping into this niche. Financial services tech firm Current recently launched the Current Student Account, a preloaded Visa debit card connected to a parent’s account with tight parental control and supervision.
The card, which comes with an iOS or Android app, allows parents to denote how money will be earned through various chores, and to transfer allowance as it is earned. Teens can divide their funds into three digital wallets: spending, saving and giving, which helps teens identify local charities to which they can donate. Parents and teens are able to track purchases as they are made.
The company charges a $3 monthly service fee, which is higher than what a bank typically charges for a preloaded spending card. But it’s appealing how this digitized allowance can be tied to chores and responsibilities in a tech-friendly way.
The goal is to encourage good financial management, saving and charitable giving habits among teens.
These may be among the most valuable lessons parents can give.