by Kathy Kuhl
Part 3 of a series on life skills (which began here).
My kid bought a $36 soda
Remember several years ago, when banks got bad publicity for charging $35 overdraft fees on debit cards? For struggling learners those fees were especially painful. Some consumers thought that a debit card purchase would be declined if there was no money in the account. They were wrong. Twice, my nineteen-year-old bought an 89 cent soda and paid $35 in overdraft fees.
Yes, getting into debt is bad. Yes, it was a painful, but useful lesson. I breathed a sigh of relief when those fees were changed, and when my teen learned not to use debit cards unless he was sure there were sufficient funds.
How do we get our kids to manage money wisely? Young people dealing with dyslexia may have trouble keeping track of a bank balance. People who are impulsive may think splurging on a soda is a pretty tame bit of impulsivity. People who are distractible may forget to record the last transaction.
So what’s a parent to do?
How to Teach Money Skills
Money management skills are not something you teach in a few lessons to these exceptional students. You need to break it down, teach in small chunks, repeat, and keep lessons as engaging as possible.
Many people have written on teaching about financial skills. Whose writings you’ll prefer to consult will depend on your values. Three I suggest you look at are listed below in the resource section, but there are other good ones. Rather than reinvent them, in this post I’ll focus on a few related topics to demonstrate that teaching our kids money management skills is both important and doable.
Watch those fees! Shopping for a bank
Sometimes our struggling learners need life skills broken down into smaller chunks. One chunk I often see omitted is in shopping for a bank. Banks encourage you and your young adults to save, and this is a good overall principle.
But when you break things down, bank fees should often discourage you from that bank. For instance, I once opened an account at a second bank, which urged me to keep two accounts: checking and savings. While traveling, I accidentally overdrew the checking account.
(Nowadays, online banking systems and their alerts via email and text can help prevent this, so teach your teens to set up these alerts and use them.)
But here was the big lesson. I returned home, went to the bank, and closed the savings account.
“But wait! You won’t earn interest,” they pleaded.
True, but I had done the math. I told them, “At that savings account’s interest rate, it will take 18 months to make up what I lost with that one overdraft fee.” At that time, it was better for me to have it all in one account.
In the same way, monthly maintenance fees can cost much more than what you earn in interest. How can you tell?
Finding the Break-Even Point
Here’s how to help your child calculate how much they need to have in an account to earn enough in interest to cover the maintenance fees. This is what I call the break even point for a bank account:
Explain to your child that APY is the compounded interest rate. An Annual Percentage Yield (APY) of 1% means if the bank keeps $100 of your money for a year, you get $1, that is a few cents each month. So if the APY is 0.9%, you get 90 cents when the bank keeps your $100 for a year. If they keep $1000 of your money, you get $9 interest, and so on.
For those students who struggle with math, practice a lot of simple examples until they get the concepts of 1% versus 0.1% interest, 5% versus 0.5%. You might use 1000 craft sticks to represent $1000. Use simple numbers, especially multiples of 2, 5 and 10, since those are the math facts most struggling learners know best.
Then look up the APY for the account your teen is considering. Work with them to calculate how much money they have to put into the bank in order to earn enough interest to cover the fee.
Here’s an example:
A bank offers 0.9% APY and charges $3 monthly maintenance fee. That’s pretty low, so it looks like a good deal. Is it?
- $3 a month means $3 x 12 = $36 a year.
How much money do you have to deposit to earn enough interest to cover that fee?
Let’s call the answer to “how much money” M. M is the amount of money we need to put in to earn $36 of interest a year.
The interest we’ll make in one year, 0.9% of our money, M, needs to be at least $36.
- That means 0.9% of M = $36.
Convert the percent to decimal (aka a decimal fraction):
- 0.009 of M = $36
In words that means 9 thousandths of M is $36.
A fraction (or decimal fraction) of a number means a fraction times that number, so
- 0.009 x M = $36
To solve for M, divide both sides by 0.009
- M = $36/0.009
- M = $4000
Your teen has to have at least $4000 in this account to make enough interest to cover the monthly maintenance fee.
Be sure to look for banks and credit unions that will waive the fee for children’s accounts. That isn’t a permanent fix, however, since your teen is growing. So it’s worthwhile to work with your teen on these calculations.
Then why save at all?
In a time of low interest rates, it will become obvious after a few of these calculations that many accounts sare too expensive to be practical. I don’t recommend hiding savings under the mattress. However, interest rates like these clearly won’t motivate our kids to save. What can we do in this situation?
What will motivate them to save is understand how much worse it is to get into debt. The kinds of calculations we discussed above can help to make this vivid to them. If a 0.9% APY sounds like pathetic earnings, try showing them how much 18.5 or 24.% interest on credit card debit balloons into a nightmare.
Teach our kids to save to avoid debt. “Pay yourself first” is good advice. Better yet, I’d suggest you first give to God, then to yourself (i.e. your savings), then to everything else.
Check out the resources below for more on how to teach kids about money.
- Dave Ramsey’s Smart Money, Smart Kids and more from Dave Ramsey at his website.
- The Boys Scouts of America have a merit badge called Personal Management that includes financial skills: comparative shopping, budgeting, insurance, different ways of saving, stocks, credit cards, debit cards, and more. You can download the requirements for the badge here. We used this as part of our homeschool curriculum.
- PAFS offers a podcast, a blog, and books teaching kids, teens, and young adults financial skills.
- Some credit unions and banks have helpful articles, such as this one. Disclaimer: I am not recommending this or any other bank, just the article. Check the fees. Calculate how much your child would need to deposit to earn enough interest to cover the monthly fees, as shown above.
Next time, I’ll talk about a few more life skills for teens, as well as ways they can continue learning. Please share your tips and questions below. Thank you.