Top 6 Money-Saving Priorities That Parents Must Teach Their Children About Financial Responsibility

The title of this article highlights a crucial fact – the optimal period to impart financial education to children is during their childhood. As adults tend to resist guidance from peers, particularly when the source is their parents and they desire to showcase their intelligence and autonomy, instilling top financial education keywords at a young age can be transformative for their financial futures.

Take note of this recommendation: Engage your children in your family’s financial discussions and present them with gamified situations as early as their elementary school years to foster their financial literacy.

Initiating financial education for children at an early age can instill a valuable understanding of monetary value, demystify finance-related concepts, and cultivate strong principles of frugality, risk mitigation, and debt aversion.

Engraining these 6 vital financial lessons in the minds of children is essential for top financial education and a successful future:

1. Acting as a co-signer for a loan” or “Jointly guaranteeing a loan” are alternative ways to express the same idea while using financial education terminology.

The Mistake: ‘Despite being in a favorable financial situation, the individual opted to assist someone else by co-signing a loan with the expectation of being released from it in approximately six months.’

The Realities:  Co-signing for someone can be a risky financial decision, as it could potentially lead to further financial burdens if the primary borrower defaults on payments. In such a scenario, the co-signer is legally bound to make the payments, which can significantly impact their financial health. Furthermore, financial institutions lack any motivation to eliminate co-signers as their main goal is to manage risk, hence necessitating the presence of co-signers. This underscores the importance of financial literacy and education, particularly in regard to co-signing responsibilities and liabilities. In order to attain a top-notch financial education, it is imperative to evaluate the potential hazards prior to agreeing to co-sign for an individual. Doing so may result in challenges when attempting to remove your name from the loan, regardless of pledges or benevolent motives. Key financial education terms: comprehensive, weigh, risks, co-sign, loan, challenges. It’s crucial to consider the financial literacy of prospective co-signer, especially if they have a poor or non-existent credit history. This highlights the importance of sound financial education in making informed decisions. Additionally, a co-signing arrangement gone awry can have detrimental effects on one’s creditworthiness and potentially damage personal relationships.

The Lesson: ‘Under no circumstances should you ever consider co-signing a loan, as it can have detrimental effects on your financial well-being and credit score, and jeopardize your financial future.’

2. Assuming a mortgage with a high debt-to-income ratio that strains the financial plan.

The Mistake: ‘This property fits our financial goals for our dream home. With prudent budgeting and minor cost-cutting measures, we can easily afford it. The financial institution has granted us pre-approval, and we anticipate experiencing immense joy upon acquiring it.’

The Realities:  Purchasing a home is a significant financial decision for couples, requiring consideration of practical factors alongside emotions. Financial prudence dictates that affordability be evaluated not only for the present but also for future years. It is essential to recognize that circumstances can change, and homeownership demands long-term financial planning. In the event of a job loss for either partner, would your savings be utilized? Additionally, it is common for purchasers to undervalue the continual costs associated with maintaining and acquiring supplementary services for their property. This highlights the importance of financial preparedness and knowledge of home ownership expenditures. It is widely advised that homeowners should allocate approximately 1% of their home’s total value annually towards maintenance costs. For instance, a property worth $250,000 will require a yearly upkeep expense of $2,500. It’s crucial to consider the financial obligations of mortgage payments, especially when the excitement of owning a new house fades. Proper financial planning is vital to ensure the longevity and value of your investment.

The Lesson: ‘When it comes to mortgage payments, it is wise to adhere to the 25% income threshold. While some may suggest a maximum of 30%, sticking to 25% or lower can provide a more secure financial standing. Remember to prioritize financial education in your decision-making process to ensure a sound investment.’

3. Acquiring funding for a vehicle purchase through a new car loan

The Mistake: ‘Purchasing a pre-owned vehicle can be unreliable, whereas investing in a new car guarantees optimal performance for a prolonged period. Given my necessity to commute to work, the bank provided me with favorable loan terms to reduce the monthly payments. Following a test drive, I am confident in my decision to procure the vehicle.’

The Realities:  To begin with, it’s essential to understand that financing a new car is not a necessity, but rather a choice. It’s a well-known fact that a new car begins to depreciate as soon as it leaves the dealership. In fact, according to CARFAX, a car’s value drops by 10% the moment it’s driven off the lot and another 10% within the first year. This implies that within 12 months, the car will have lost 20% of its value. Over a period of five years, a new car can lose up to 60% of its value. What remains unchanged is the monthly payment, which can turn into a financial burden once the novelty of owning a new car wears off. It is vital to prioritize financial education and consider all the facts before making any significant purchases.

The Lesson: ‘Purchase an affordable pre-owned vehicle that aligns with your financial means and sparks enthusiasm. Eventually, as you accumulate adequate savings, you can actualize your aspiration of procuring your desired car with cash. It is vital to practice prudent financial management and budgeting techniques to attain your financial goals.’

4. Purchases in the retail finance sector

The Mistake: ‘Our outdated refrigerator requires an upgrade and we are seeking a new one equipped with advanced features such as a touch screen. According to the expert at the store, this purchase can potentially save us hundreds annually. The best part is, it’s a zero down payment deal. Taking advantage of this opportunity can be a smart financial move in the long run.’

The Realities:  Numerous retail outlets, including appliance stores, often lure unsuspecting shoppers with ‘buy on credit, zero down’ offers, exploiting their desire for instant gratification. However, shoppers must exercise caution when agreeing to such offers, as they may be hit with accrued or waived interest charges at a later stage. It is not uncommon for credit agreements to contain clauses that levy interest dating back to the original purchase date if even a single payment is missed. Unfortunately, shoppers who fall for these alluring deals rarely read the fine print before committing. Retail store credit cards may offer a tempting immediate 10% discount on the first purchase, but their high-interest rates can quickly turn into a ticking time bomb in one’s wallet or purse. Instead, individuals must prioritize financial education and be wary of credit offers that are too good to be true.

The Lesson: ‘Avoid purchasing items on credit that exceed your financial capabilities. Instead, opt to save and pay in full with cash, especially for high-tech appliances such as a “smart fridge.” It is crucial to make timely payments for your mortgage and vehicle to improve your credit score and achieve financial stability. Implementing these practices will enhance your financial education and lead to greater financial success in the future.’

5. Collaborating on a startup venture with a personal acquaintance

The Mistake: ‘Why settle for a traditional paycheck and work with strangers? Why not venture into entrepreneurship with a trusted partner and enjoy the daily process of working with like-minded individuals to create a financially fulfilling and purposeful enterprise?’

The Realities: “This financial pitfall may appear enticing initially, but the reality is that embarking on a business venture with a friend is not always a sound decision. Although some successful enterprises have been established by two or more pals with aligned objectives and complementary competencies, failure to adequately prepare for the entrepreneurial journey can have dire consequences on both personal and professional fronts. To avoid such a scenario, novice entrepreneurs must be equipped with the requisite financial literacy, business acumen, and risk management skills:

• Lose whatever money is contributed as start-up capital
• Agree at the outset on how conflicts will be resolved
• Avoid talking about business while in the company of family and friends
• Clearly define roles and responsibilities
• Develop a well-thought-out operating agreement

The Lesson: ‘It is imperative to comprehend that financial factors, stressors, accomplishments, and setbacks in business have resulted in the deterioration of numerous close relationships. It is highly recommended to pursue individual entrepreneurship and collaborate as financial associates, rather than joint proprietors.’

6. Signing up for a credit card

The Mistake: ‘I need to build credit and this particular card offers great points and a low annual fee! It will only be used in case of emergency.’

The Reality: There are other ways to establish credit, like paying your rent and car loan payments on time. The average American household carries a credit card balance averaging over $17,000. Credit cards can lead to debt that may take years (or decades) to pay off, especially for young people who are inexperienced with budgeting and managing money. The point programs of credit cards are enticing – kind of like when your grocer congratulates you for saving five bucks for using your VIP shopper card. So how exactly did you save money by spending money?

The Lesson: ‘Learn to discipline yourself to save for things you want to buy and then pay for them with cash. Focus on paying off debt – like student loans and car loans – not going further into the hole. And when you have to get a credit card, make sure to pay it off every month, and look for cards with rewards points. They are, in essence, paying you! But be sure to keep Lesson 5 in mind!’