As parents, it’s no secret that our behavior affects our children. How we conduct ourselves in public and in private, our relationships and the way we relate to our kids all have the ability to shape their lives into adulthood. While you may be focused on right vs. wrong, please and thank you, what about financial lessons? According to a study conducted by the Money Advice Service (MAS), a UK-based government organization, money habits are formed as early as age seven. In partnership with the University of Cambridge, Habit Formation and Learning in Young Children revealed that:
“…sources and amounts of money that children control influence their learning. If parents and teachers support and model specific decision-making, it is probable that children will engage in the behaviour and potentially develop such financial habits.”
Translation: Your children will mimic your financial behaviors. So, are you raising a spendthrift or a fiscal conservative? Learn the answer by asking yourself the following questions.
- When my son wants a toy, do I give in every time? Restraint is a valuable tool in the realm of creditworthiness. Maintaining a low credit utilization ratio means resisting the urge to overspend, max out credit cards and live outside your budget. While your son’s toy may only cost a few dollars, he only understands supply (the toy) and demand (his wants). Teach him the lesson of self-control by saving purchases for special occasions and rewards.
- Does my daughter see me break my own rules? Children may not understand the concept of hypocrisy, but they understand weak will. For example, suppose you have committed to spending less on entertainment each month, but you love taking your daughter to the movies. At the beginning of the month, you vow to stick to your guns, but are thwarted when a new Pixar film enters theaters. Your daughter assumes that your reasons for spending less must be unimportant.This scenario isn’t unusual. Creature comforts are tough to avoid, especially with the mindset of, “It’s only a few dollars.” While it may not break the bank, consider the effects on your daughter’s future behavior. Invest in her success by taking an active interest in your own.
- What do my kids understand about money? How often do you talk to your kids about money? How much do they understand? While you may think they are too young to grasp the finer points of budgeting, savings and investments, social science suggests otherwise. Create age-appropriate games to help them learn the fundamentals. For example:Your son wants to borrow $20 to buy an action figure. You agree, but say he must repay you with interest just as you do with a credit card. At the end of the month, accept his $20 with 12 percent APR (a steal!) attached. He’ll learn the drawbacks of credit balances in no time.
- As a family, how often do we rely on credit? Speaking of credit, what role does it play in your household budget? Do you use it for a specific purpose or does it serve as a catchall for your basic purchases? Here is another opportunity to hone your credit repair skills while involving your kids in the process. Assign expenses to each credit account: groceries and gasoline for Card A, daycare and entertainment for Card B, etc. Ask your kids to draw a chart outlining the maximum monthly amount you can spend on each card. As you progress through the month, allow them to color in the chart to illustrate spending. A visual will help the whole family control the budget, credit utilization and overall credit strength.
- How can I better explain the importance of credit? It’s simple: talk. Make an effort to talk to your kids every week about how credit shapes their lives: the home they live in, the car you drive, your ability to save for college, apply for new loans and secure fair interest rates. Review the Five Factors and highlight the need for good credit every time when it appears in everyday life. You can’t control your kids’ actions as adults, but you can give them a solid foundation. Don’t wait to get started.