Pierre Money Mart Blog

With credit-card offers coming as fast as keg party invites, college freshmen need some guidance.

The typical college freshman is burdened enough by scholarly responsibilities, homesickness, and self-doubt. To keep tomorrow’s freshmen from suffering the additional angst brought by a first checking account, start them off sooner, as early as their junior year in high school.

Initially, keep it simple, avoiding frills and extras like overdraft protection; they need to experience the reality of bounced checks to understand record-keeping responsibilities.

Many college freshmen today have credit cards, and if your kid is to be one of them, then this, too, has a learning curve that is best experienced under your tutelage.

Before your kids acquire their credit cards, they’ll need a lesson in how to use plastic responsibly. Point out that this is where most individuals’ finances go seriously awry, and illustrate your point with interest tables that show the damage that 18 percent annual interest, compounded over the years, can do to their savings potential.

Also, tell them that credit is a privilege, not a right, and that if they abuse it, they will lose their ability to get more.

After setting up rigid criteria for the use of a credit card, start them off with training wheels in the form of a secured card – in which the holder charges only up to a cash account kept with the issuer.

This way, they become accustomed to using the card judiciously without getting in hock. If their purchases are sound enough, then move on to an ordinary credit card, encouraging them to pay the balance each month to avoid interest charges.

When your kids go out to make purchases on this card, they may be tempted by same-as-cash purchase offers, in which buyers of items like appliances are allowed to borrow interest-free as long as they pay off the balance within a set period (usually six months). Financial planners like Eleanor Blayney of McLean, Va., advise against using same-as-cash. “It disassociates the cost from the benefit,” she says.

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Your kid doesn’t like to save? Try the carrot – and then the stick.

One way to encourage your children to develop sound money discipline is to make savings a condition of their allowances. So try to account for this when deciding on a weekly or monthly figure.

This, of course, means setting a budget – and deciding what to do when children run afoul of their own guidelines.

One answer is to require them to save their allowances in locked boxes. But since this doesn’t teach restraint and you won’t always be around to oversee savings deposits, there are more instructive ways to make the point.

Neale S. Godfrey, co-author with Carolina Edwards of Money Doesn’t Grow on Trees: A Parent’s Guide to Raising Financially Responsible Children (Fireside, 1994), recommends what she calls the Bill-Paying Game, inspired by a scene in the film, “I Remember Mama.”

Count out a reasonable “salary” in play money, like that from a Monopoly game. Then, take some old bills and write the amount due on the back of the envelope of each. Show the child the entries in each for “date due,” “minimum payment due” and “balance due,” then let them decide how much to pay. If the allotted money is enough to pay the bills, everyone wins.

Use the leftover money to introduce the concept of savings. The younger your child, the more limited his or her concept of time.

If they’ve been receiving your sage financial teachings from an early age, older children shouldn’t have trouble understanding the concepts of long-term and short-term saving. If not, illustrate the concepts by using goals, as with a new video game a month from now versus a bicycle this summer.

Remind them of these goals to keep them from straying.

The more worthy and ambitious the long-term goal, the more you may want to consider matching grants to reward your child’s savings discipline. These grants can be anywhere from 1.25 to 1 to 3 or 4 to 1.

Younger children understandably have trouble grasping off-site savings, so the best mechanism for them is often a piggy bank for coins and a wallet for bills. Count the money with them periodically, and tell them how close they’ve come to their goals. Above all, praise their progress.

Once children reach the age of 9 or 10, they’re more amenable to banks. Quantitatively adept children of this age can understand the concept of interest rates. Until they’re old enough to handle a checking account, children may take withdrawals as cashier’s checks or money orders.

The best way to encourage sound spending habits is to exhibit them. When planning a trip to the grocery or discount store, get your children involved in making a judicious list and sticking to it. This will teach them to avoid the bane of all savers: impulse buying.

For big-ticket items like appliances, show them how to do the research: reading articles and reviews, phoning stores to see if your choices are in stock, negotiating with salesmen on price, going to several places to see what’s available and compare values.

Doubtless, an occasional purchase will be defective. No problem. Use this to demonstrate the importance of saving sales receipts and reviewing warranties. When you return the goods, take your children along and show them how to overcome salesmen’s arguments.

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