Financial Literacy - It's Up To Us Parents (Part 2)
In this space two weeks ago, we began discussing the wisdom of educating our kiddos in the area of personal finance and age-appropriate concepts that should be taught, getting up to about age 11. This week let's continue on with ideas for older children.
11 to 12 Year-olds: At this age, I think it is appropriate to begin teaching youngsters about credit cards. I don't mean letting them have one necessarily, but at least introducing it to them.
Having been taught the basics of loans and debt already (see Part 1) will help in the understanding of how credit cards work. Explain that credit cards are a form of debt that allows you easily, maybe too easily, to buy something without have to pay for it immediately. Instead, when you buy something with a credit card, the credit card company pays for that purchase and sends you a bill. If you don't pay that bill quickly, they charge you extra (i.e., interest or a finance charge) and the longer you take to pay it back, the more it costs you and the harder it is to repay.
It's important to emphasize that while credit cards are almost a necessity these days, they should not be used to buy things that they cannot pay off right away because of the extremely high finance charges most companies impose. It is also a great idea to teach them the difference between credit cards and debit cards.
12 to 13 Year-olds: Income taxes (gulp); yeah, thatís right, income taxes. Ok, so while we may be naturally cynical about this topic, let me suggest this explanation for your kiddos (no snickering now). Income taxes are what we pay to the government so it can pay for what it does, like building roads and schools and protecting our nation. Further, most people have their taxes taken out of their paychecks at work, and how much you pay is tied to how much you make. That's all it takes. You might also show them a copy of your own paystub to illustrate.
Investment is another concept to introduce to this age group. An investment is something that you spend money on now, which you believe will earn you even more money (known as a profit) later on. This may be a harder concept to teach, but you can creatively do so by encouraging your kids to "invest" some of their funds in your "investment account" (i.e, a safe place of your choosing) in return for which they will earn a profit of some kind over time. Make it a game of sorts to keep it fun for them. But remember, it's also important to teach them that while we always hope our investments will make money, that does not always happen. That is why it is important not to put all your money in investments that are risky in nature.
14 Year-olds and over: With an understanding of investment under the belt, this is a good age to introduce "Stock". Explain that stock is ownership of a piece of a company. It has value (or a price) and that value will go up or down depending on how the company is doing in business or other events happening there. Pick a company that is familiar to them (a lot of folks like to use Disney for example), and help them follow that company's stock price listing in the newspaper or TV. Older kids often really enjoy this and get interested in the markets in a hurry. There are online games and apps that can be used as well to create virtual stock portfolios and are great teaching tools.
A related topic for this age is the subject of 401(k) plans, one of the potentially most valuable retirement planning vehicles available. You can explain that a 401(k) plan is like a savings account for retirement that is offered by an employer. The money that you put into a 401(k) comes right out of your paycheck, and because it is intended for retirement, you typically cannot withdraw it until age 59 and a half (a least not without a penalty). In many 401(k) plans, the employer will even match a portion of what you, the employee, contribute.
As an added bonus, you don't pay taxes on the money you put into your 401(k) even though it is part of your pay, allowing more money to be available to grow and earn over your working life. And most plans have multiple investment options to help you get the most from your investments.
15 Years-old and over: No financial education would be complete without the mention of a credit score. This is especially important once your child begins using a credit card. So, how to explain a credit score?
Try this description; there are three credit bureaus, which calculate your "credit score", basically a measure of how wisely you use your money and handle debt. The goal is to have a high credit score. The way to get a high score is to have a long established history of paying your bills on time. When you don't pay your bills on time or you have too much debt, your score gets lowered. Your child should also understand that having a good credit score helps tremendously in the future when they want to finance the purchase of a home, car, etc., while a low score can hamper such things by making it hard to borrow money (or at least do so at a decent interest rate).
There are many other financial terms that could be covered in the education of your children, but making sure your little darlings have a basic understanding of what we have covered in this and the preceding column will help them a long way done the path to financial literacy and success.