5 Basic Credit Lessons to Teach Your Kids

Your parents may have prepared you as best they could for the financial realities of adulthood, or they could have left you to figure it all out for yourself. But if you were taught the basics of finance and credit before you left the nest, you may have encountered less of a learning curve than your clueless counterparts. No matter your level of understanding, you likely have to do some learning yourself.

But now, if you’re the parent, one of your priorities is to prepare your kids for adulthood. Just as you would teach your children to dress themselves, ride a bike or do their laundry, you may want to impart lessons about credit to them to help them become successful and financially independent.

Here are five credit lessons you may wish to impart.

1. It’s Important to Regularly Check Your Credit Reports & Credit Scores

Credit reports and credit scores may seem like abstract concepts to teach your children. But you can use simple metaphors. School-age children can understand the concepts of grades and report cards, and these concepts apply to credit. The work you put into your credit is reflected in your credit report and credit score, which “grade” your performance. These grades can then be used to help you get “rewarded,” like by getting the best rate on a credit card or a loan, like for a car or home. (You can check out your free credit report summary on Credit.com, which includes grades on how you’re doing in the five key areas that make up your scores.) This brings us to our next lesson …

2. Credit Affects Their Life

Once your child understands the concept of a credit report and credit score, you can demonstrate how credit has affected your lifestyle. Many of your possessions — your home, car or credit card, for instance — were obtained using credit, and are examples of the power of credit. Of course, credit is not just a way to get “things.” It’s a tool that can help provide shelter, comfort and freedom.

3. There Are 5 Main Influencers of Credit

As your kids get older and have a firmer grasp on these concepts, they may be able to better understand how they can make credit work for them. You can show them credit is determined by five main factors:

  • Payment history
  • Debt usage
  • Age of accounts
  • Types of accounts
  • Credit inquires

If you own credit cards, have loans and monitor your credit report, you have teachable moments built into your financial routine. When your children are old enough, you can involve them as you pay a bill or check your credit report, explaining the process as you go.

4. Mistakes Can Cost You

Mistakes can be valuable life lessons for young people. But when it comes to credit, mistakes can be costly and their effects can be long-lasting. One late payment can cause your credit score to drop dramatically. And negative items such as accounts in collections and judgments can stay on your report for at least seven years. To a young person, seven years can be a long time to have difficulty obtaining loans or credit cards. You can also show them how errors on your credit report can be fixed by using this guide.

5. Credit Cards Are Merely Tools

Credit cards are not a magic wand for reckless spending, but they are also not inherently risky items to be avoided. They are tools. They can be invaluable to build credit and financial independence, but they can also be damaging if wielded incorrectly.

It’s no secret that young people can have trouble with impulse control. But you may want to impart that credit cards can be used responsibly or irresponsibly. The results will depend on the user.

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3 Strategies to Teach Your Child to Invest

Chicago, Ill.-based actor Mike Wollner says at ages 7 and 10 his daughters are already learning how to invest.

Three years ago, Wollner opened custodial brokerage accounts for the girls through Monetta Mutual Funds, which has a Young Investor Fund specifically for young people to invest for the future. Through the fund, parents can open custodial brokerage accounts or 529 college savings accounts on behalf of their children, as well as get access to financial education and a tuition rewards program.

Wollner decided to open the accounts once his daughters began to nab acting gigs and earn an income. They’re already beginning to understand what it means to own a part of the world’s largest companies. “They will ask me to drive past Wendy’s to go to McDonald’s and say, ‘well, we own part of McDonald’s,’” he says.

Wollner hopes his daughters will have saved enough for college by the time they graduate high school. His 10-year-old’s account balance already hovers around $13,000, while his 7-year-old has a little less than $10,000 saved for college in her account.

The contents of the package a child receives in the mail when an adult opens a Monetta Mutual Young Investor Fund custodial account on their behalf.

The Value of Starting Young

The Monetta Fund is only one example of a way to invest on a child’s behalf. The downside to using an actively managed investment account like the one Monetta offers is that it comes with higher fees — the fund’s expense ratio of 1.18% in 2016 is higher than the 0.10% – 0.70% fees typically charged by state-administered 529 college savings plans.

In addition to 529 plans, parents can open Coverdell Education Savings Accounts, or other custodial brokerage or IRA accounts through most financial institutions like Fidelity, Vanguard, or TD Ameritrade.

A college fund serves as a great way to teach kids a little about the time-value of money, but they’ll need to know more than that to manage their finances as well as adults.

“There’s no guarantee that they are going to be financially successful because anything can happen in life, but you’ll be better off with those skills and have a better chance of being successful with those skills than without them,” says Frank Park, founder of Future Investor Clubs of America. The organization operates a financial education program for kids and teens as young as 8 years old about financial management and investing.

He says FICA begins teaching financial concepts at an early age with hopes that the kids who start out with good money management habits now will continue to build on them as they age.

“If they fail to get that type of training now, it may be years into their late 20s, 30s, or 40s before they start. By then it could be too late. It could take 20 years to undo the mistakes they’ve made,” says Park.

3 Ways to Teach Young Kids About Money

Use real-world experiences

Wollner has each daughter cash and physically count out each check they receive from acting gigs.

“They just see a big stack of green bills, but that to a child is cool. It’s like what they see in a suitcase in the movies,” says Wollner.

He then uses the opportunity to teach how taxes work as he has his daughters set aside part of the stack of cash to pay taxes, union fees, and their agent.

“They start to see their big old pile of money diminish and get smaller and smaller,” says Wollner, who says the practice teaches his daughters “everything you make isn’t all yours, and I truly believe that that’s a lesson not many in our society learn.”

Kids don’t need to earn their own money to start learning. Simply getting a child involved with the household’s budgeting process or taking the opportunity to teach how to save with deals when shopping helps teach foundational money management skills.

Park urges parents to also share financial failures and struggles in addition to successes.

“They need to prepare their kids for the ups and downs of financial life so that they don’t panic if they lose their job, have an accident, or [their] identity [is] stolen,” says Park.

Gamify investing

Gamified learning through apps or online games can be a fun way to spark or keep younger kids’ interest in a “boring” topic like investing.

There are a number of free resources for games online like those offered through Monetta, Education.com, or the federal government that aim to teach kids about different financial concepts.
Wollner says his youngest daughter benefited from playing a coin game online. He says the 7-year-old is ahead of her peers in fractions and learning about the monetary values of dollars and coins.

“This is how the kids learn. It’s the fun of doing it. They don’t think of it as learning about money, they think of it as a game,” says Bob Monetta, founder of Monetta Mutual Fund. The games Monetta has developed on its website are often used in classrooms.

When kids get a little older and can understand more complicated financial concepts, they can try out a virtual stock market game available for free online such as the SIFMA Foundation’s stock market game, the Knowledge@Wharton High School’s annual investment competition, or MarketWatch’s stock market game.

“The prospect of winning is what makes them leave the classroom still talking about their portfolios and their games,” says Melanie Mortimer, president of the SIFMA Foundation.

Anyone can play the simulation games, including full classrooms of students.

Aaron Greberman teaches personal finance and International Baccalaureate-level business management at Bodine High School for International Affairs in Philadelphia Penn. He says he uses Knowledge@Wharton High School’s annual investment competition in addition to online games like VISA’s websites, financialsoccer.com, and practicalmoneyskills.com, to help teach his high school students financial concepts.

Adults should play the games with children so that they can help when they struggle with a concept or have questions. Adults might even learn something about money in the process. Consider also leveraging mobile apps like Savings Spree and Unleash the Loot to gamify financial learning on the go.

Reinforce with clubs or programs

For more formal reinforcement, try signing kids up for a club or other financial education program targeting kids and teens.

FICA, the Future Investors Clubs of America, provides educational materials and other support to a network of clubs, chapters, and centers sponsored by schools, parents, and other groups across the nation.

When looking at financial education programs, it’s important to recognize all programs are not equal, says FICA founder, Frank Park.

“Generally speaking, you’re going to go with the company that has a good reputation of providing these services, especially if your kid is considering going into business in the future,” says Park.

The National Financial Educators Council says a financial literacy youth program should cover the key lessons on budgeting, credit and debt, savings, financial psychology, skill development, income, risk management, investing, and long-term planning.

Mortimer suggests parents also try getting involved at the child’s school by offering to start or sponsor an after-school investing club. She says many after-school youth financial education or investing organizations nationwide use SIFMA’s stock market simulation to place virtual trades and compete against other teams.

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6 Toy Drones for Your Holiday Wish List


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Even 3-Year-Olds Know When You Owe Them


Perhaps we can all be grateful that toddlers aren’t professional debt collectors.

Hypothetically speaking, let’s say you’re in debt and someone sent a 3-year-old to your door. One glance at those large, innocent eyes looking up at you and asking you to settle up would probably send you running for your checkbook. I doubt you’d even attempt to negotiate your debt. You definitely wouldn’t slam any doors in their faces.

But watch out if a toddler ever wants to loan you something; you might just fall into accidental debt. A new study demonstrates that three-year-olds know when you owe them.

In order to get a true measure of indebtedness, a series of experiments was performed with resources a toddler might value most: stickers and toys. Markus Paulus at Ludwig-Maximilians-University of Munich, took three-year-olds and five-year-olds in groups ranging between 28 and 43 kids and had them participate in a sharing game. The toddlers were tested individually, and had to choose how many of their stickers they wanted to share with specific toy animals of different colors. The game was intentionally crafted so that the toddler would choose a favorite animal to share more stickers with. There were winners and losers. Sadly — if you can feel sorry for a toy — one toy animal only got one sticker or no stickers at all. Such is life.

Researchers leveled the toy animal playing field by showing the toddlers that each of the animals was actually IW (independently wealthy), with its own sticker collection. After adding them all up, kids were shown that each toy animal had the same number of stickers, so even the sad, disadvantaged animals balanced out to the same amount.

Then came time for payback. Suddenly, the toy animals were gifted with irresistible toys that would cause even the most disciplined three-year-olds to stop in their tracks, swoon and start to whine, er, pine — colorful balloons, oh-so-shiny marbles and coloring books graced each animal. Each animal had the same number and type of toys. For a few rounds, the toddlers were told to choose which animals they’d ask to share its alluring resources. Time and time again, the toddlers approached the animals to whom they had given the most stickers.

“At this age, expectations for reciprocity seem to develop, and these expectations start to affect children’s behavior,” Paulus told Credit.com.

If No One Sees It, It Never Happened

Interestingly, researchers then varied the study a little. This time, they had the animals leave the room before the toddlers decided how many stickers to share with each one. So, technically, the toy animals never “saw” when toddlers gave them preferential treatment or more stickers. But by age 3, their young minds already knew that a favor done without a happy recipient didn’t count in the favor bank. When it came time for the toddlers to hit up which animal they’d ask for toys, they no longer asked more from the animals to whom they’d given more stickers. They seemed to know the favor would never be recognized if it hadn’t been seen.

Why It Matters

“I think it really helps us to know how deeply wired we are for relatedness,” said child psychologist Dr. Bob Bartlett in White Plains, NY. From the moment a child is born, the little person relies on expectancies and patterns to navigate life, he said. Nursing mothers and their newborns often perform a “complicated dance” of relating and needing space through body posturing and eye contact, says Bartlett. “That becomes woven into the way we connect with other people as we go forward. So we’re really wired for a sense of expectancy.” Our first experiences of fairness and indebtedness shape our philosophies of meaningful relationships.

“From early on, our parents and caregivers help teach us what to expect from relationships — how sharing is undertaken, how others are thought about. They emerge and really take shape,” Bartlett continued. And we learn reciprocity as it is reinforced by our family and by larger communal settings such as preschool, he said.

It can be witnessed when a toddler’s sense of unfairness is spot on — as soon as they see another kid receive something they don’t have, says Dr. Bartlett. (Just hand an ice-cream cone to another toddler, and see what happens with yours.)  “Automatically a child will want what’s given to another,” Bartlett says. “It’s all based on our own need of wanting others to attend to us and give to us.”

And adorable toddlers certainly know how to gain credit in your heart.

Remember, modeling good financial habits can help your kids later in life. You can go here to learn about getting control of your money. And you can view a free snapshot of your credit report by enrolling in an account on Credit.com.

Image: Christopher Futcher

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15 Things to Put on Your Back-to-School Shopping List


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14 Toys That Will Keep Your Kids Entertained & Out of the House


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15 Easter Basket Goodies That Aren’t Candy


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5 Things to Get in Order When You Have Kids

Overcoming the Struggles of Unpaid Maternity and Paternity Leave

Everyone likes to talk about how much money it costs to have and raise kids, but one other topic that sometimes gets glossed over is all the other financial and life details that new parents should have in place before their first child is born (or shortly thereafter, at least).

While we wouldn’t call this a finite list, the following are definitely some of the more important documents and plans you’ll want to have in mind before little Junior makes his or her appearance.

1. Put together a will and trust

Besides the obvious advantages of leaving your possessions and assets to the people you pick, a will is important for a lot of other reasons — for people with and without kids. When you do have kids, though, this becomes even more necessary as a way to legally name guardians for your children should something happen to both you and your significant other. When you don’t have a will in place that names these guardians, a court would decide what happens to your children, where they go and who will raise them, if something were to happen to you, and that’s probably not what you’d like to have happen.

One other important thing to keep in mind is the difference between custodians and guardians. Remember, the person you name as your child’s guardian doesn’t necessarily have to be the person who’s also in charge of your child’s finances. That duty can go to a custodian, who will then take care of any money left in your kids’ names until they turn either 18 or 21 and can take over that task for themselves. Check out this piece for more on how to put a will in place if you need one.

2. Get a life insurance policy

When you have a family, it becomes even more important to put some sort of life insurance policy in place as a way of ensuring that, if something happened to you, the spouse who is still around will be taken care of financially, and so will your kids. While you can set up your life insurance policy for whatever your want it to cover, most financial experts who help you pick one will ask you to consider certain factors, such as:

  • Do you have a mortgage to pay off?
  • Do you want to put one or more kids through college?
  • What sort of monthly finances would be necessary to replace the lost parent’s income?

Adding all these factors together, you’ll be presented with an approximate amount that would cover all of these situations, should something happen to you. While the overall number might scare you at first (think in the millions here, especially if we’re talking about putting a couple of kids through college), there are actually some great plans on the market today that won’t cost you an arm and a leg each month to get.

3. Consider disability insurance

When it comes to disability insurance, consider it this way — if you’re young and healthy, the odds are much greater that you’ll injure yourself and be unable to work for a given amount of time than that you will actually pass away (at which point your life insurance policy would come into play). A disability insurance plan would help cover your family’s necessary expenses while you get back on your feet. Group disability plans are often through employers, and while individual plans are available, they are likely to be a bit more costly depending on your particular situation (if you’re older with high cholesterol, for example, you’ll probably pay more than a young, healthy person). On the other hand, if you’re okay with what your employer offers but would like a little bit more coverage, a supplemental plan might be able to help you make up the difference. For more on disability insurance, check out this story.

4. Have a power of attorney

A power of attorney isn’t necessarily something many people think about when it comes to financial planning, but it probably should be. Assigning someone power of attorney gives them certain rights to make decisions for you based on the type of power of attorney you pick. For example:

  • General powers of attorney retain comprehensive rights to act on your behalf, and this type of power of attorney can last until you pass away.
  • Limited powers of attorney can only make decisions for specific purposes and for a set amount of time. This might be useful during something like an illness, where you are unable to make financial decisions yourself.
  • Durable powers of attorney essentially maintain all the same rights to serve for you as a general power of attorney, and their powers remain effective even after a person becomes incapacitated, so there is no need for court involvement.
  • Durable powers of attorney for health care allow you to name someone to make health care decisions for you when you cannot make them for yourself.

Setting up a power of attorney ahead of time for whatever your needs might be can save your family a lot of time and trouble (and legal woes) if something happens to you.

5. Create a living will

A living will is a statement that details your desires regarding medical treatment and the like when you are no longer able to express these things yourself. Putting something like this in place helps take the burden off your family to make these decisions during what will likely already be a stressful and emotional time.

Again, while there is much more to estate planning than just the policies and documents listed above, starting with them will help you rest assured that your family will be taken care of emotionally and financially, no matter what the future may bring.

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