Parents teach kids how to do things like ride a bike and tie their shoes, so why not teach them how to save for a home? In some cases, parents may not be confident in their own ability to manage money or don’t want their kids to know about their financial mistakes.
Whether it’s through actual sit-down talks or observed behavior, some of us may learn about money and finances through our parents.
Here are 6 financial mistakes that may have been passed from one generation to another, in one way or another.
1. That You Have to Buy a House
Some parents will teach their kids that they need to buy a house as soon as possible, and that paying rent is like throwing money away every month.
This is not bad advice, per se, but we all need to acknowledge that previous generations grew up in completely different financial climates.
Between the amount of debt that young adults are racking up through student loans and the competitive nature of the housing market, trying to jump into buying a home too quickly before you’re truly financially ready may lead to becoming “house poor”. This happens when most of your money is tied up in mortgage and other house payments, with very little left over to spend or save elsewhere.
While there’s some variance, some experts define affordability by people’s ability to pay 28% of their income or less on the cost of housing, which includes:
- Mortgage payments
- Insurance payments
That does not include other house-related costs such as utility bills or upkeep.
Some millennials may want to pay off their student loans before they even think about buying a home, which as we’ve explored, may take longer than ever.
Parents putting too much pressure on their kids to buy a home too early may be setting them up to carry too much debt at once.
2. To Only Have One Financial Safety Net
Many parents will teach their kids to methodically put money away for a financial emergency, such as automobile or home repairs, or if something truly bad happens and they’re unable to work for some time.
While this is a great habit to build, simply having a single safety net may be one of the more common financial mistakes young people make.
This might be a larger portion of the population than you would have thought.
It may be helpful for a young person to apply for a line of credit as a financial safety net, in case they run into an emergency expense that their savings can’t cover. This, of course, depends on a variety of factors, including the ability to pay back the line of credit.
3. Using Credit Cards in Front of Kids Without Explaining How They Work
It may seem like the most normal thing in the world to a child. A parent takes them along for a trip to the grocery store and at the end, the parent pays for everything with a credit card. Later in the day, they go to the gas station and do the same thing.
Without any context or explanation, a child can start to see credit cards as currency. They just see the cards being used everywhere, without any education of what balances, interest rates or credit utilization ratios are.
This mentality may even continue when that child grows up and gets their first credit card during or after college. They may start using it without a financial plan or an understanding of what they may be doing with their credit.
This means that too many young people may only learn how credit cards work after they have already accrued some level of debt.
However, a child that has been taught exactly how a credit card works may use credit tactfully and properly as an adult. They may use it to actually build their credit history and set themselves up for a better financial future.
4. Carrying Too Many Credit Cards
Kids may also have memories of their parents’ wallets overstuffed with a slew of credit cards. They may have seen some common credit cards, or maybe a few other kinds from various department stores.
Parents may tell their kids that it’s good to have a few cards just in case.
Yes, it is true that:
- A credit card (or two) may act as a financial safety net.
- A variety of credit from different sources can be a good thing, depending on your financial situation.
However, carrying too much plastic may be harmful for two main reasons:
It May Enable Impulse Buying and Overspending
The lure of these cards can often be some sort of offer, like receiving 15% off in-store purchases when you pay with that store’s particular credit card. This might be enticing, and one may feel like they’re saving money by using the card.
However, it’s important to remember that this is a credit card and not a debit card. That 15% savings can quickly be negated if the cardholder doesn’t pay the balance down quickly. If a balance isn’t paid down on time, this leads to owing interest on a purchase that was supposed to save money.
These cards may also make it too difficult to track your spending, especially when you’re out and about and shopping at multiple stores. On a busy Saturday morning, you may lose track of the fact that $50 here and $50 there can add up to a few hundred dollars before noon. If you’re paying with credit cards, you may not even realize exactly how much you spent until you look at all the receipts together or check your balance online.
This is why some financial experts advise people to make as many of their retail purchases as they can with cash. There are psychological effects that go along with paying for items with cash instead of a card. You start your week with $250 and you can literally see and feel the money leaving your wallet.
A Lack of Credit Activity
Some parents will advise their children to get these cards, but, only use them in case of an emergency. This is well-meaning advice that’s trying to keep young people from using a card to overspend.
However, while inactivity on a credit card may not hurt your credit, it may cause you to miss the opportunity to build credit history.
An inactive card will likely have no impact on your credit score. However, a healthy mix of making semi-regular (and relatively small) purchases and promptly paying down the balance may build your credit score, as you’re sending signals to credit agencies that you’re using credit the right way.
This may help your credit score by keeping a low credit utilization ratio, while keeping on top of regular payments.
5. Making the Subject of Money Taboo
From a young age, we’re taught that talking about money may be rude. We’re never to ask someone how much money they make, or how much they paid for something.
While this keeps certain social graces intact, this type of thinking may demonize talking about money in any shape or form. Tactful conversations with our family and friends about money can actually be invaluable.
Young adults may be especially shy about having these conversations with their friends. In most cases, everyone in their circle of friends is just starting out and earning a starting wage. People may be struggling and don’t feel comfortable talking about it.
However, this is when open conversations about money could benefit people the most. Learning from friends that they’re saving money by doing ABC, or cutting costs with XYZ can really help build the right type of habits early in life.
6. Simply Saying “No, We Can’t Afford That”
Yes, this seems like a simple and honest answer whenever a kid asks for the newest video game console, however, we can do better for our children.
This is an opportunity to have a real conversation with your kids about money and teach them about financial goals. Instead of flatly saying that you can’t afford a trip to Disneyland, you may consider telling your child that a trip for the whole family to Disneyland could actually cost as much as a new car, and that’s what the family is working towards right now.
If children just hear “no” and “we can’t afford that” without a discussion or more explanation, the concept of affordability becomes a bit abstract. Children may tie the term “affordability” to anything nice that they can’t have. It can seem like a parent is being withholding, instead of the parent being thoughtful and responsible.
Be Thoughtful About What You Pass on to your Children
Do any of these things sound familiar? Did you unintentionally pick them up from your parents? Are you teaching them to your kids? The good news is bad financial habits are breakable. Good habits will not happen overnight, but they may take less time to build than you think.
You can take control of your financial future and put the right pieces in place today to build a better tomorrow. You can also make good financial practices a habit, so that if you have kids, they can observe positive behavior from you.
And as always, don’t be afraid to have conversations with them, even as soon as they’re earning their first dollar from a paper route.
Posted in: Lifestyle