The Covid-19 pandemic really highlighted how financially troubled our society is. Debt levels are extremely high, bankruptcies are commonplace and many Americans are living paycheck to paycheck. Today’s adults are suffering and may be setting the next generation up for trouble, as well.
Tackling the financial literacy crisis in America begins in the home, as financial education courses are still not being taught consistently in schools across the country.
Yet, according to a T. Rowe Price study, 36% of parents are “very” or “extremely” reluctant to discuss finances with their children, and another 26% say they are “somewhat” reluctant. As a result, kids today have no concept of money or how it works.
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Despite this reluctance, it’s important for parents to start the money conversation at home with their kids. With that said, here’s a basic guide of financial concepts that you can discuss with kids at various age ranges.
- You need money to buy things. You can talk to them about the different forms of money we use — coins, dollar bills, and credit and debit cards. Have them consider all the things that cost money — toys, groceries, their backpack, etc. Also explain that a lot of things that have value are free. Spending time playing with a friend or cousin is really fun and doesn’t cost a dime.
- Money is earned by working. Talk about your job or profession and why you chose it. Use examples of jobs they recognize like teachers, fire fighters and mail carriers. You can talk with them about ways they might think of to make money.
- You might have to wait to buy something you want. Delayed gratification is a hard concept even for a lot of adults to understand. The sooner children accept this fact, the better. Have them identify an item they’d like to buy. Maybe it is a toy or piece of candy. Talk about how much it costs and help them count out the money required to purchase it.
- There is a difference between what you want and what you need. Talk about all the things we need to buy with our money — clothing, food, a home to live in. Then make a list of things we like to have, but don’t necessarily need to live — toys, candy, Paw Patrol slippers.
- You must make choices about how to spend your money. There are trade-offs, and money can run out. Give them some money with the task of choosing which snacks to buy for the week. Do you want to spend money on something, or can you borrow it or buy it somewhere used or at less cost? Once it is spent, it is gone.
- It is good to compare prices. Explain there are lots of ways to buy things. You can physically go into a store to buy it, look for it online (perhaps via the magical land of Amazon) or buy it used from someone else. They can help you look through coupons or wait for sales to get better pricing.
- You should save a at least a dime for every dollar you earn. Encourage the habit of saving 10% of all money your child receives. Have them set goals for things they’d like to save up for.
- Using a credit card is like a loan. Most likely, they watch you use cards all the time and might have questions about it. They need to understand this is actually a financial transaction taking place and money is going out.
- You should avoid using credit cards if you can’t pay the balance off each month. They need to understand if you don’t pay the bill in full every month, interest can work against you and you’ll end up paying more for the item than it actually costs. At this age, they are a lot closer to having their own credit card.
- You must pay taxes on your income. This is an important concept to understand well before they graduate from college and get their first full-time job. Explain what taxes pay for in your community.
- The importance of having an emergency fund. Provide examples of why it is important to always keep some cash in savings. You can cite examples of emergencies you’ve experienced — appliances breaking, losing a job and medical issues and how having a savings cushion helped you get through these times. Or alternatively, talk about how you regretted not having an emergency fund when you needed it.
- Basic investing concepts. If they are earning income, you may consider setting up a Roth individual retirement account for them and talking about basic investment concepts so they can get some hands-on experience in watching their money grow.
Here are some additional tips for parents:
- Provide real-time examples of trade-offs you make. When you are at the store with your kids, compare prices together and tell them why you are choosing to purchase one item over another. Talk to them about something you saved up for and how long it took you to do it.
- Use allowance as a learning tool to create teachable moments. We need to put our kids in scenarios where they make and manage their own money before they are out in the real world. Let them spend the money they earn and help them set goals to save up for bigger items. If you are going on vacation, let them bring their own money to spend on snacks or trinkets that you wouldn’t normally buy for them. Help them get a feel for what these items cost.
- Let your kids fail and learn. Let them make silly purchases and check in with them a week later to see how they feel about it. Are they still enjoying that $10 pack of Pokémon cards, or did they end up in the recycle bin last week? Congratulate them on the purchases that they got a lot of use out of or saved up for. Let them practice, fail and learn how the real world works. You want them to learn and make mistakes while they are still under your roof.
- By age 14, start “real-world” training. Take the amount that you would normally spend on them for entertainment, clothing and other needs and put that into their checking account each month and let them manage it. If they spend it all on a pair of designer sneakers in the first week and have no money to go to movies with friends later, they have learned the lesson that money is finite, and they need to manage it better next month.
Education is power — when you know better, you can do better.
When it comes to money, being able to manage it well is part of a healthy lifestyle. If you can engrain a behavior early on, the better it will stick.
Kids who grow up with a good education around money with healthy habits will grow into adults who are less likely get stuck in a dangerous debt cycle, are better prepared for emergencies and have the surplus to give to charity and support their communities.
— By Jamie Bosse, certified financial planner at Aspyre Wealth Partners