How to Teach Your Teens to Avoid Debt

Some parents have an easier time talking to their kids about “birds and bees” than finances and fees. And maybe that’s why members of Generation Y — currently in the age 18-34 demographic that’s highly targeted by advertisers – aren’t figuring out how to manage their money well on their own, either. We’ve got some advice below, but first, let’s talk facts.

Two new studies show that parents and young people love spending money but hate talking about it. One of those studies is by credit giant American Express. It found…

• One in three parents say that talking to their teens about an allowance is worse than discussing a first car purchase.
• It goes both ways: Nearly half of teens say that asking for money is a “hassle.”
• 62 percent are looking for ways to teach their kids about the importance of money management before they overspend.
• More than half of teens (56 percent) and parents (54 percent) worry about safety and losing money when teens carry cash.
• Parents want more financial resources for their teens, including online tools to manage their teen’s money and spending.

As a result of its findings, American Express is asking parents to have what they call “the talk” – about money, not sex. On Monday, Sept. 16, AmEx is sponsoring something called “National Money Night Talk.” It’s the perfect time for parents to chat with their middle school, high school, or college-aged kids about money. In fact, AmEx even suggests you sign “The Pledge,” which says: “I promise to talk to my kids about money to help ensure they have the life skills they need to live responsibly and independently.”

“The Talk” is more important than ever, says Western Union, which conducted its own survey and found that many members of Generation Y are struggling with debt more than their parents. In fact, their findings suggest the recession might be damaging them more than any other group:

• Half of Gen Y respondents reported feeling increased stress about financial obligations in the last six months
• More than one in three members of Gen Y say that their financial situation has worsened in the last six months
• About 27 percent of Gen Y survey participants have been turned down for a loan or line of credit
• 60 percent of Gen Y’ers have not seen their credit score in the past year, and 44 percent have never seen their credit score.

The report’s not all doom and gloom, though. Western Union vice president David Shapiro notes that Generation Y is highly independent – mentally if not always financially – and tech-savvy, two traits that might help them get out of a financial mess.

“The silver lining is that, in spite of the difficult economy, Gen Y is engaging in behaviors that can help build a better financial future,” Shapiro says, citing “Gen Y’s use of tools such as online bill pay to manage their budget and credit standing. Factor in their high comfort level with web-based programs and budgeting tools, and Gen Y has a solid foundation for getting their finances back on track.”

Knowing that, here are some tips for parents that will help raise financially healthy children…

1. Stay strict about allowances. Be deliberate and explicit about doling out an allowance. Make sure your kids are doing something to earn it, and don’t give in when they blow it all and ask for more. According to that AmEx survey, parents give an average allowance of $66 per month. The problem isn’t the dollar figure, it’s the expectations: Most parents believe an allowance is for completing chores, maintaining good grades, and/or behaving well. But some teens in the survey believe they get an allowance just because.
2. Set a good example. Just like you can’t tell your kids to Just Say No to drugs if you’re doing them yourself, you can’t expect them to become financially responsible if they observe you being irresponsible. So pay your bills on time. According to credit score creator Fair Isaac, approximately 35 percent of your credit score is based on your bill payment history. Know and understand your credit history – get a free report from all three national credit-reporting companies once every year at AnnualCreditReport.com – and show your high-school age kids what it is, how it works and why it matters.
3. Teach them on their terms. Teens aren’t good at thinking long-term, so don’t expect to wow them with the possibilities of compound interest. They don’t care about what you wish you’d done differently 20 years ago, no matter how wise you’ve become: they’re all about right now. So focus on short-term saving and smart spending instead of investment. Likewise, don’t expect them to balance a checkbook or use a calendar – find the high-tech (and often free) alternatives they’re more comfortable with.
4. Steal their tech. You can learn from your kids, too. Since Generation Y is so tech-savvy, consider using their tech to keep track of due dates for bills. Your bank probably offers automated bill paying online, so ask about it. And use free web-based alternatives like Google Calendar to note important financial deadlines. It’ll make your kids proud, and give you an opportunity to collaborate and teach each other.

Of course, it’s never too early to start teaching good money management. At holiday and birthday time, consider giving your younger kids gifts that teach wise spending from the get-go. You can check out some of our ideas in 5 Money Related Gifts for Kids. Then use the gift as a way to start an ongoing dialogue about money – you’ll thank yourself when they’re not living with you at 30.