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Financial savvy-ness for young adults

Teens need to learn personal money management skills early

In a financial literacy survey given to high school seniors by the Federal Reserve, only 52.4 percent of the questions were answered correctly. And what's to become of these seniors when they graduate from high school and are out on their own? In a survey conducted by Bankrate.com, more than one-third of adult participants received an "F" grade, while 60 percent received a "B," "C" or "D," and only 7 percent of the participants received an "A."

Financial savvy-ness is becoming more important in an increasingly complicated financial world. Many financial experts have predicted that high school seniors will not have Social Security come retirement age. To further complicate issues, the cost of housing has gone up 26 percent in five years, while income has only gone up 10 percent, and housing isn't the only thing rising in cost. According to some consumer reports, costs for nearly everything have continued to go up, while income has essentially hit a plateau.

Teens are at an even greater risk to be in larger amounts of debt than ever before, which makes budgeting and planning essential. Most schools do not teach money management, and often times it doesn't occur to parents to teach this skill. It is important for parents to teach their kids financial literacy, even if they don't feel so literate themselves.

In discussing the following basics with them, they will become aware of the importance of money management -- and knowing is half the battle. From there they will be more inclined to pick up good habits on their own. Read on for tips on how to be financially savvy and teach our future -- our children -- crucial personal money management skills:

Discuss the importance of personal financial management with your child. Explain to them the basics of financial responsibility. Also, discuss with them the concepts of owning a home, investing in the market and retirement planning, and emphasize that all are important items they need to become aware of in order to survive in today's world.

Discuss general money management behaviors, such as: o Paying bills on time to avoid fees and to maintain good credit o Reading bank statements regularly o Keeping an emergency fund worth three months of pay o Comparison shopping for mortgages, auto loans, insurance, etc. o Following a budget

Discuss the difference between needs and wants. Our needs are limited: We need food, shelter, water, clothes and companionship -- after that everything else is a want. In a materialistic and consumer-crazed country like America, it's easy to forget which is which. Spending is also a choice. A homemade meal is a need, while steak at a fancy restaurant is a want. Wants come second to rent, food, retirement and that three-month emergency fund. If, and only if, after all the needs are covered and bills are paid, there's money left over, then head on over to the steak house.

Discuss the importance of budgeting. Even if you're not much of a budgeter yourself, it is wise to help your kids understand it, and allow them to make the choice of whether they will be a budgeter or not. Explain to your kids that budgeting their money will help them achieve those wants in life, because they will know exactly where their money is going, and it will keep them from overextending themselves. Kids should understand the breakdown of an ideal budget:

o Housing costs - 35 percent: mortgage/rent, taxes, utilities, insurance o Transportation costs - 15 percent: car payments, gas, insurance, repairs, parking, etc. o Debt payments - 15 percent: student loans, credit cards, personal loans o Other living expenses - 25 percent: eating out, vacations, entertainment, clothes, medical expenses o Savings - 10 percent: Retirement planning, emergency fund, investments

Do a budgeting activity. Although many of us do not like to discuss our bills with others, it is your responsibility to see that your child sets out into the world armed with the proper knowledge. Collect all of your household bills, and go over them with your teen. Explain to them how much money you have to pay, and have your child write out the checks for them. If you pay your bills online, then have them go through that process with you as well. After the bills are paid, discuss how much money is left over and what will be done with it. Plan out the money's use: write out groceries, include that co-pay for baby's visit to the doctor this month, anticipated gas, etc. Make sure you budget for one exciting "want" to reward your child for budgeting effectively, and to show them that once needs are met, you can then purchase a want.

Discuss credit cards. Explain to your children that a credit card's sole and one and only purpose is to help them build credit -- that's it. Unfortunately, many of us use credit cards as extra income -- we want that pair of shoes, so we put them on our credit card. Without the card, we wouldn't have been able to afford the item. This train of thought is what gets many consumers into trouble. Help your child understand that credit cards are meant to be used like this: Let's say you budgeted for a $100 shopping trip at your local grocery store, so $100 is what will be coming out of your paycheck for food this month. Spend your $100 at the store and charge it to your credit card. When the credit card bill comes, pay $100. Now you've used the card and paid it in full. This is what credit cards are for.

Do a credit card activity. Gather all of the credit card offers you receive for the next two weeks, and then sit down with your child and help them decide which is the best offer (this of course does not mean you are going to actually apply for the card). Go through the offers, look at interest rates, the annual fees, etc. Explain to them that even though they are trying to get you to open the card because you are "pre-approved" for zero percent, if you were to apply for the card, it is quite possible you could actually get 9 percent or 14 percent instead. And if that's the case, don't use the card. "Pre-approved" only means you were approved to receive the advertisement, but they haven't run your credit yet so it doesn't mean you are guaranteed the rate they are offering.

Discuss the importance of good credit. Kids should understand that good credit equals more opportunities in life. Maintaining good credit will allow you to afford cars, a home, etc., because when you show you are responsible, you are rewarded by receiving trust from lenders, and therefore better interest rates and more opportunities.

A good credit score is approximately 700 and above (maximum is 850), and credit scores are mathematical equations created out of the information in your report, like whether you have made delinquent payments. Credit scores are made up of: 35 percent payment history, 30 percent amounts owed, 15 percent length of history, 10 percent new credit, 10 percent types of credit. Given these factors, maintaining consistent payments is paramount, and staying away from the credit line on credit cards (not "maxing them out") is also important.

Your teen should plan on opening a credit card as soon as they turn 18, but if, and only if, they are going to use it to build credit, and not as extra income.

Discuss why retirement is so important. In high school, kids are bound to really have no understanding of why retirement planning is paramount, so this could be a tricky one. Explain that once they stop working in their old age, they will still have needs, such as shelter, food and clothes. Where will they get money to pay for these things? Being able to live in their old age is a need, and therefore more important than a lot of those wants they'll have along the way in their life. Once again, putting money toward retirement comes before that steak at the fancy restaurant.

Still feeling lost? There are many Internet resources and books out there to help parents teach their children about money management. Visit JumpStart Coalition's Web site, which has the sole purpose of educating kids (www.jumpstart.org), or try www.consumerjungle.com, a Web site for parents on teaching children about credit and finances.

For more information, visit Debt-Free America's Web site at www.debtfreeamerica.com.>

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