Financial Literacy - It's Up To Us Parents
But personal finance is one of those subjects that will impact our children for their entire lives! It's imperative that we, as the grownups (i.e., parents) figure out a way to teach this stuff to our children because they likely won't get it anywhere else.
In a blog earlier this year on BusyKid.com, Mike Prusinski wrote "We don't allow teenagers to drive a car, fly a plane or operate heavy equipment without requiring sufficient education because the results could be tragic. Yet we allow our teens to enter our complex financial world with little (or no) education. There have been millions of people tragically affected by the lack of knowledge about credit card debt, student loans and bad mortgages."
He has a point, a significant one.
He added, "At a minimum, a teen should be exposed to how credit works, how to budget and know the basic terms of saving and investing. They should also understand income taxes, retirement accounts, credit scores and student loans."
While some schools offer classes in financial literacy, most do not. So, again, parents, what are we Going to do about it?
In an effort to kick start the conversation, over the next two columns I'll present what I think are financial words and terms that children need to be taught, and do so based on age appropriateness. So, let's get going, shall we?
4 Year-olds and over: "Savings" is a great topic to introduce at this young age. Kids can understand the idea of saving fairly easily. It's important for children to understand the wisdom of not spending all their money "right now", but instead that some should be held back for later wants and needs.
You can get creative in ways you teach this idea. For example, think of something small that your child likes, say a favorite cookie. On day one, give your child two cookies. Let them eat one and save the other for later in resealable bag. Do this every day that week. When the week is over, bam, they have a bag full of cookies! What a yummy way to teach that when you save a little bit along the way, it adds up to something big!
8 Year-olds: Some financial terms appropriate to teach 8 year-olds include "Budget", "Loan" and "Debt".
You can explain that a budget is plan; one that helps you keep track of your money and how it is used. One way I've heard budgets taught to adults that is also applicable to kids I think is using an envelope system to divide up money between that which will be used to "save" for something long-term, "spend" now as they wish and "give" to help others. Some will divide the "spend" category even further into types of spending. You could also use jars for this technique.
Figure out a way for your child to earn some money, and when they do, help them divide it between the various envelopes. And whatever you do, don't neglect the "give" envelope. Let your kids decide how they want to donate their money and they will experience the rich rewards of helping others!
The terms "loan" and "debt" are, of course, closely related and can be taught together. Explain that a loan is money borrowed from someone else, and usually has to be paid back with interest (see below). Most kids will get this because likely at some point in their young lives they have let someone have something belonging to them with full expectation of getting it back.
It's important in explaining loans and debt to let your kids know some of the good and not so good reasons people go into debt. For example, loans are used to buy things that cost more money than you may have on hand at the moment, such as a house, but that you know you can afford over time.
Of course, you must stress that when you do take out a loan or go into debt, you have to pay it back. And because of the interest cost, it ultimately costs you more than if you were able to pay for it all up front, so saving and paying cash is usually your first best choice.
9 to 11 Year-olds: Interest is a concept that, depending on the level of maturity of your child, can be taught during this age range. Remember to teach that interest can either be something that you have to pay (if you have taken out a loan or are in debt) or can be something that you receive by lending money to someone else.
One way I have taught this is to ask to borrow money from my child with a promise to pay it back with interest. So, for example, I might borrow $10 and then pay them back the original $10 plus $1 in interest the next week, explaining why I did this. You might also show them a bank statement where your bank paid you some interest on an account, or conversely, a loan statement where they can see the interest you had to pay.
When they get older, you can have them calculate interest on a hypothetical car loan so they can see how much extra it would cost to have the loan versus paying cash, or even use readily available online software to run a 30-year amortization schedule and show them how much more money has to be shelled out on a home mortgage over the life of the loan because of interest. That will get their attention (and maybe yours)!
Next time, we will tackle more financial terms appropriate for older kids, so stay-tuned.