By Essie Bester
Your teenager will soon be entering the adult world, armed only with his own judgement and the knowledge you have managed to convey to him. One of the biggest advantages you can offer him is to empower him with solid financial management skills before he leaves the safety of your home, says Salem Dyafte, spokesperson for the registered credit bureau TransUnion.
According to her, it is important that young people learn from an early age how to prioritise their spending as well as manage their credit so that it will work effectively in their favour, rather than ensnaring them in a debt trap.
There comes a time in most people’s lives when they have to incur debt, albeit it for buying a home or a car, or to pay for tertiary education, she says. However, she warns, just like Dave Ramsey, America’s trusted money expert, against the convenience of a credit card. Credit card debt is something that should be avoided at all cost – as excessive debt is the equivalent of handcuffs.
How do I make my child moneywise?
Encourage your child to learn managing his pocket money while still in primary school. Help him to work out a reasonable repayment plan if he should ask for an advance or a loan and make sure he sticks to it. “In this way you cultivate the good habit of seeing to it that his loan his affordable and that the required amount is paid back in time – a characteristic that is absolutely essential when he grows older and has to maintain a good credit profile,” explains Dyafta.
Teach your child how to compile a budget. Find out on what he spends his money and together with him work out a plan for it. Allow him to offer mature inputs, determine his own priorities and then manage his budget accordingly on his own.
- Watch out for the small things that have gigantic consequences
Teach him that small expenses incurred may appear quite harmless, but over time these can run into a significant amount that could have earned good interest in a savings account.
- Teach him how to set long-term savings goals
During his teen years, his own motorcar is probably first and foremost in his mind. Let him pay for it himself if he wants one. Budget how much he should save every month and for how long before he has enough for a decent deposit on a vehicle. Early exposure to setting goals helps to cultivate patience and vision, two things he will need throughout his life.
- Build a good credit profile
Sometimes incurring debt is unavoidable (such as when buying a home) and for that you need a good credit profile. Encourage your teen to start building on it. Credit providers like to see that an applicant has experience in handling debt. This is why banks, shops and service providers look at an applicant’s credit report before deciding whether or not to grant him the credit.
Without a solid credit profile that reflects good credit conduct, the credit provider might decide not to grant the credit, or limit the applicant to a lower amount than required under less favourable conditions – such as higher interest rates.
- Teach him to not incur debt which he cannot repay
Young people should not try to obtain as much credit as possible – especially if it isn’t within their means to repay it as set out in the credit agreement. Teach your child to apply for credit in a judicious manner and to use it wisely.
- Don’t allow him to get into the habit of incurring debt
According to Dyafte, the four steps to a healthy credit profile are as follows:
- Apply to a shop for a credit account with a low credit limit.
- Limit the extent of your credit dependency by always trying to keep the balance on the account below 30% of the limit – stay away from your maximum credit limit.
- Always pay the required amount within the specified time. Don’t skip payments – even if you pay double the following month, it will affect your profile negatively.
- After having become credit active, you are entitled to one free credit report per year from any credit bureau. Ask a credit bureau such as TransUnion to ensure that your report reflects your payment history and conduct accurately.
Ramsey says the big advantage of making your child moneywise, is that his feeling of responsibility permeates other areas of his life. Money is important for a teenager and one who is careful with spending it, will not be irresponsible and hang out with the wrong friends or not care about his points in school. The feeling of accountability will take effect in all areas of his life and help him to take the right life decisions.