Countless TV programs, video games, and apps are designed around the marketing of toys, movies, theme parks, and merchandise to your children. So, it’s not surprising when kids learn early that money and credit cards are the way to buy the things they want.
Financial education has been proven to produce a strong, significant difference in confidence and money handling abilities in young adults.1 Unfortunately, financial literacy is taught by only 12% of schools.2 Where will your kids learn how to handle money? Answer: from their biggest role model – you.
Below, find helpful suggestions to teach your child about money and personal finances.
For very young kids, keep it simple
Show them how to save early on, and make it fun
Start your children out young with an old-fashioned piggybank. As they get a little older, say two to five, look for toys and phone/computer apps that introduce the concept of money. Some apps will help introduce the idea of “needs versus wants,” and normally, the best apps have to be bought.
A lemonade stand could also teach a few things about investment, expenses, and profit in a fun way. It’s also a great way to bring arithmetic home.
For young adults, introduce the concepts of debt and interest
Consider the very important messages for the long run
Certain lessons will be more instrumental than others in teaching children the skills they’ll need to successfully manage finances. Apart from learning how to save for the big things in life, those lessons would have to include how to be vigilant about debt, grasping how compound interest works (both in the way it builds up in your favor, and against you if it’s a debt), how to protect your assets, and how to invest with care. Depending on the maturity of your child, introduce these ideas in early high school.
Use terms they’ll get
The simplest way to explain compound interest is that of a snowball rolling down a hill, gathering more snow on the outside and picking up volume, so that it would be gargantuan by the time it reaches the bottom. Teach your kids that interest works both ways, either earning you more and more money, or draining more and more of your finances if you’re paying it. This may have the effect of increasing their incentive to save, or equally important, to head off credit card debt later on. As kids get older and have a part-time job, talk about opening a Roth IRA account with some of their earnings. They’ll see the power of compound interest (and one day, way down the road, they'll greatly appreciate the tax-free feature).
Teach the concept of protecting what you have
With young adults, their first exposure to insurance is likely to be through the process of acquiring car insurance when they get their license and first car. If you haven’t already brought up the concept of financial protection, it’s an ideal time to bring up forms of insurance that safeguard the family’s financial security, e.g. home/apartment insurance, health insurance, disability income insurance, and any other policies you maintain to protect against liability or the loss of property and income.
Kids know the power of “plastic,” but it pays to be cautious in terms of granting them a credit line, and teaching them about money should be done in stages. Start them with a debit card, which will allow “charges” against existing savings in their bank account. If there are no bad surprises, add them to one of your credit cards for emergencies, setting up alerts to notify you of charges above a limit. If that goes fine, you could move them to their own “secured credit card,” which has a limit. You could also encourage them to get a part-time job (if study habits allow time), to start saving money and build a banking history of their own. Without a credit history, they will likely need you to co-sign a credit application - a big decision on your part. You’re agreeing to take responsibility for all charges on that card, and if not managed correctly, it will impact your own credit rating. Make certain to set up firm boundaries and clear expectations, or consider having your child apply for his or her own card once they are old enough.
While it’s a nice concept to help your child graduate without student debt, some parents believe that paying off a loan can be a valuable lesson in responsibility. Consider teaching your children about debt in real terms by having them take out a student loan.
The values that parents must try to instill in their children aren’t always the most fun for children to learn, but they’re extremely important to your child’s future. With planning, they’ll pick up a healthy attitude toward finances that will make their future, and yours, more secure.
1. Erin Mitchell, "Evaluating Financial Literacy Statistics," National Financial Educators Council, 2013.
2. Jenny Che, "America Isn’t Teaching Kids How To Manage Money. And That’s A Problem," Huffington Post, April 4, 2016.