When teaching a young adult to make smart financial choices — start with the basics and move in to the scare tactic.
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Dear New Frugal You,
I need your help. My 19-year-old son doesn’t have any money sense. He’s been working full-time for over a year and a half, making reasonable money. He says he’s saving for an apartment, but he’s still living with me. It seems like he spends a lot on video games, his car and going out with his friends. Now he admits to a growing credit card balance. How can I help keep him from a future debt disaster? — Camile
You’re right to be concerned about your son. Pew Research Center earlier this year said that roughly one in four 18- to 34-year-olds admit to having moved back in with their parents.
The current economy has made it hard for young adults to get their grown-up financial lives started. They face much higher unemployment than they did five or 10 years ago. Those in the 16- to 24-year-old age bracket have an unemployment rate over 16 percent.
But it’s more than the economy that’s made it hard for them. Finances are more complicated than they were for earlier generations. Mortgages, auto loans and credit cards offered fewer choices in years past. There were no ATM fees. Credit scores didn’t exist. There were fewer chances to seriously mess up your life.
Any parent who has gone through it will tell you it’s hard to share knowledge with an unwilling young adult. But there are some things that you can do to help keep your son from a financial meltdown.
There are two keys to financial maturity. The first is education. Your son needs to understand basic money concepts. The second key is to see how his decisions can make his life easier (or tougher).
Financial education doesn’t need to be difficult. Any young adult can learn enough to manage their money effectively. Begin by encouraging them to learn some basics.
Money that’s borrowed must be paid back. With interest. Any time you pull out a credit card or sign a loan agreement, you’ve committed to repaying what you’ve borrowed, plus interest and possibly fees. You will always pay back more than you borrowed.
Teach him that debt has a tendency to grow all by itself. Very few people carry the same balance from month to month on their credit cards. They’re either paying it down or watching it slowly increase month by month.
Paying it down is more difficult. That often requires sacrificing to find the money. Letting the debt increase doesn’t take any effort.
You can explain how credit scores work and how they affect his credit, employment, insurance and even what apartment he can rent. An excellent credit score will make all those things easier. A lower score will make them harder and more expensive.
Earning a high credit score isn’t that complicated. It’s pretty much a matter of not borrowing too much money, paying your bills on time and continuing to do that for a number of years.
Unfortunately, earning a low credit score is much easier. Borrow too much, miss a few payments and open or close credit card accounts on a frequent basis.
Make sure he learns a little bit about credit counseling, debt collection and bankruptcy. This probably falls under the ‘scared straight’ category. Explain to him that if he falls behind in his payments, he’ll be forced to turn in credit cards and could have money taken from his paycheck without his permission. His ability to borrow money could disappear.
Explain penalty interest rates. Let him know that the card issuer can decide that all new charges will incur rates in the 20-plus percent range.
Once you’ve done all that, help him to see how those things will directly affect his life. Take the theoretical and make it real.
Encourage him to divide the interest he pays each month by his hourly pay rate. That should help him to see how long he has to work to pay for past borrowing. It will also allow him to see what he could be buying if he didn’t have to pay the interest.
You’ll want him to understand how difficult it is to get out from under payments. Work through what happens when he’s ‘upside down’ in a car loan. How he might be required to buy a used car and commit to paying for it for seven or more years.
You might also want to spend some time sharing what it takes financially to buy your first home. Let him see how much he’ll need to save for a down payment and closing costs. If he’s smart, you can even encourage him to start a savings account for that purpose.
Camile, it’s not easy helping your child reach financial adulthood. But it could be one of the most important legacies that you leave your son.
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