As a parent trying to give your kids every chance to succeed, you cover a lot of ground. You worry about things like all the roles you have to play, how you can help your kids do better in school, about whether or not you’re role-modeling all the things you want your kids to be.
You can be forgiven if you miss a few things here and there. So what I share here is meant to help you get them there (to successful adulthood).
New research from online lender SoFi conducted among over 1,000 parents in December, 2018, says parents are talking to kids about money, especially about savings and budgeting, which is great. But a whopping 92 percent of parents aren’t talking to their kids about credit card and student loan debt.
Credit card debt in the US has surpassed $1 trillion and student loan debt $1.5 trillion, with someone defaulting on a student loan every 29 seconds. Let’s assume for a minute that Elizabeth Warren’s plan to wipe out student debt doesn’t come to fruition. That means this is a topic worth discussing with your child.
Being overly saddled with debt early is the opposite of starting out as a successful adult. Paycheck to paycheck living, putting off life events, or worse are all side effects of debt mismanaged early in life.
So how do you warn your kids of the danger of debt and help them establish the foundation for a sustainable financial future?
Here are three tips to share with your young-adult kids (or even younger) from financial planning expert Alison Norris, Advice Strategy Leader at SoFi and a Certified Financial Planner.
1. Teach them early about healthy spending habits.
It’s never too soon to teach about setting money aside, saving up for something, and delaying gratification. Ask your kids to set savings goals and to clarify what they want to save for. Help them understand the importance of peeling off a little of each paycheck to tuck into savings (or a giving account for charity), even if it’s a very small amount at first.
Either way, the earlier you can set up a bank account for them and begin teaching them these principles, the better. It’s also never too early to start teaching them about the importance of investing their money (my wife and I have invited our teenage daughter to sit with our financial planner now that she just opened a savings account and has her first job).
2. Teach them how to establish a good credit history and about debt-to-income ratios.
This will be critical when it’s time for your child to apply for an auto loan or home mortgage. Ensure they understand credit scores and credit in general. Show them that when you have a credit card, it’s critical to pay it off in full in each month, earning rewards or cash back where possible. Not paying off the credit card each month begins a slippery slope that, at a minimum, can lower their credit score.
It’s also important they understand the concept of debt-to-income ratio. I can tell you from my early days as a mortgage underwriter that the debt-to-income ratio consists of two numbers, the front-end and back-end ratio. The front end is a proportional measure of the debt to be incurred for your new housing, calculated by taking the total of loan payments for any liens on the property, homeowners fees, property taxes, and flood/homeowners insurance and dividing it by your total monthly income.
The back-end ratio is any recurring debt that appears on your credit report (credit cards, current mortgage payment, etc.) divided by your total monthly income.
A good debt-to-income ratio is 28/36–no more than 28 percent of your income goes to new housing costs, no more than 36 percent to overall debt.
These are helpful guidelines for the adult child just trying to put their new financial realities into perspective.
3. Create “debt grids.”
You can help your kids understand right from the get-go how quickly debt can pile up by creating a simple tracking grid. Write down all the student loans they have and any credit card debt they have on a piece of paper. Include the interest rate and required monthly payment (although you should be encouraging them to pay off those credit cards each month).
The idea is to visualize for them the cost of interest over the life of any loan and to allow them to see the accumulated impact of all their debt in one place. This will help trigger some of the important financial discipline principles shared earlier.
Someday, your child will realize how much in debt to you they are for all you’ve done. In the meantime, teach them how to keep out of debt to others.