Sending your kids off to college involves lots of unknowns: Will they handle their newfound freedom as conscientious young adults, will they behave responsibly, and will they be financially accountable?

Many students head to college with little or no understanding of basic financial concepts. Allowing kids to make mistakes can provide valuable learning opportunities, but when it comes to money, it can also lead to costly consequences.

Like many important life lessons, financial responsibility starts at home. It involves careful planning, teaching by example, and developing a healthy attitude toward both spending and saving.

Laying the Foundation: Starting Money Conversations Early

It can seem overwhelming to teach teenagers about the value of money, but the key is communication. Start at the dinner table or while driving them to soccer practice. That could lead to regularly scheduled money talks to help them understand the basics.

You can also encourage them to come to you with questions as they arise in their lives, or yours. It’s important to have an open dialogue, rather than infrequent lectures.

Begin with fundamental financial concepts, including budgeting, interest rates, credit cards, credit scores, online banking, and goal setting. These may seem like no-brainers for us and for our smarter-than-average teens, but the basics of financial literacy are learned skills, just like reading, writing, and arithmetic.

Credit Cards 101: What Your Teen Needs to Know

Five out of six students will head off to college with their first credit card in their (digital) wallet. It’s important for you to explain what those credit cards should and should not be used for.

Do you want them to have the card just for emergencies? Or is it for basic needs such as books, groceries, and gas? How about non-essentials like restaurants and entertainment?

You have to set some boundaries and clearly explain what and why they are being put in place. This is one instance where you can impose some discipline since you will likely have to co-sign for the card. By the way, that has some implications for you as well, as unpaid balances can ding your credit score.

According to a recent WalletHub survey, college students carry an average credit card balance of about $2,100 (excluding those with zero balances). Nearly 45% of card holders have a revolving balance, paying only the minimum amount due, and incurring interest charges each month.

That offers a real-life teaching moment about the high cost of compounded interest, whereby interest is added to the principal balance each month.

As fiscally responsible adults, you know that paying only the minimum amount on a $2,100 balance will result in a very long repayment period and a substantial amount of interest paid over time. Don’t assume your child understands this concept.

It’s essential to explain how compounded interest works, specifically that interest is added to the principal balance each month until the balance is fully paid off. Paying only the minimum amount each month means the balance decreases very slowly (and will increase if new purchases are made), all while interest charges continue to accumulate.

Most young people don’t realize that this means their $20 pizza can end up costing $30, and a $500 phone can end up costing hundreds more.

While compounded interest can be very beneficial when you are saving money, it can also be one of the most pernicious costs for anyone, especially young people, who are running up credit card debt.

The lesson: don’t buy something you can’t afford to pay for and pay credit card bills in full (or as quickly as possible).

Teaching Kids the Long Game of Credit Scores

The second part of that lesson is about their credit score, which will impact their ability to get an apartment or a car loan in a few years.

Understanding how credit scores work is crucial for young adults. For example, closing a credit card account – even if it’s paid off – can negatively impact a credit score because it reduces the total amount of credit available and can increase their credit utilization ratio. Poor credit scores also have far-reaching financial consequences. Not only can they result in higher interest rates on future loans, such as car loans or mortgages, but they can also lead to increased insurance costs. For example, many auto insurance companies use credit scores as a factor in determining premiums, meaning individuals with lower credit scores may pay significantly more for coverage. Teaching your children how to manage credit responsibly today will set them up for financial success and lower costs in the future.

If managing credit cards and maintaining a good credit score feels like too much responsibility right now, there are other ways to help your child manage money while still learning financial discipline.

One option is a prepaid card. You load it with a specific amount of money that your child is allowed to spend. Essentially, it functions like a debit card, but it isn’t linked to a bank account. The downside is that, unlike traditional credit cards, these prepaid cards do not allow users to borrow money or build up their credit rating.

The other option is a secured credit card. A secured credit card provides a safe and effective way to build or establish credit, particularly for young adults or individuals with limited credit histories. It operates somewhat like a prepaid card, but with a key difference: you deposit money into a bank account—usually equal to the desired credit limit—which serves as collateral. For example, if you deposit $1,000, your secured credit card will have a $1,000 credit limit. Each month, the user must make at least the minimum payment, just like with a traditional credit card. If payments are made on time over a certain period—often around 6 to 12 months—the card can become unsecured, meaning the collateral is returned and the card functions like a standard credit card. During this time, the cardholder builds a positive credit history.

Turning Budgeting into a Life Skill (Not a Chore)

What’s more boring for a teen (or their parents) than keeping track of a budget? But it doesn’t have to be too tedious. The intent, of course, is to track your spending and categorize it into broad categories so that they can see if they are on track or starting to run off the rails.

Several budgeting apps make the process pretty simple. Among the most popular free apps are: Mint, YNAB (You Need a Budget), and Goodbudget.

For younger children, parents can start by discussing earning money through jobs or allowances. Then, introduce budgeting and saving, encouraging them to set financial goals and track their spending. Is your child begging to see Taylor Swift in concert or wanting the newest PlayStation? Encourage them to save for the item – even if it’s only a percentage of the cost – and offer to fund the rest if they achieve their goal. You can also teach them that any money they receive – through allowances, jobs, or gifts – should be placed into separate buckets for spending, saving, and charitable giving. Experts say parents who model these skills often raise more financially confident and competent kids.

How EKS Supports Financial Literacy

The bottom line is, many of these skills are not intuitive. They need to be taught. And yes, mistakes will be made, but it’s usually far less costly to make them at a young age if they learn from those mistakes.

At EKS Associates, we are passionate about teaching financial literacy and helping our clients achieve financial independence. It’s never too early to start learning, and we are happy to assist our clients in this communication. We know it is sometimes tough for parents to talk to young adults. They won’t always listen to you; we know, we have kids too. Through our Young Investor Program, we meet with young adults to discuss the process of budgeting, savings, and investing. Please reach out to your advisor if we can assist your family in the journey to financial literacy.