The COVID-19 pandemic has really highlighted how financially disruptive our society is. Debt levels are extremely high, bankruptcies are common and many Americans live from paycheck to paycheck. Today’s adults are suffering and they may be setting up the next generation for trouble, too.
Tackling America’s financial literacy crisis begins at home, as financial education courses are still not consistently taught in schools across the country.
However, according to a study by T. Rowe Price, 36% of parents are “very” or “extremely” reluctant to discuss financial matters with their children, and another 26% say they are “somewhat” reluctant. As a result, children today have no concept of money or how it works.
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Despite this reluctance, it is important for parents to start the money conversation at home with their children. With that said, here is a basic guide to financial concepts that you can discuss with children of various age groups.
- You need money to buy things. You can talk to them about the different forms of money we use – coins, dollar bills, credit and debit cards. Have them think about all the things that cost you money – toys, groceries, backpacks, etc. Also, explain that a lot of things of value are free. Spending time playing with a friend or cousin is really fun and doesn’t cost anything.
- Money is earned through work. Talk about your job or profession and why you chose it. Use examples of jobs they know about, such as teachers, firefighters, and mail carriers. You can talk to them about ways they might think of making money.
- You may have to wait to buy something you want. Delayed gratification is a concept that is difficult to understand even for many adults. The sooner children accept this fact, the better. Ask them to select an item they would like to purchase. It could be a toy or a piece of candy. Talk about the cost and help them calculate the money needed to buy it.
Ages 6 to 10 years
- There is a difference between what you want and what you need. Talk about all the things we need to buy with our money – clothes, food, a house to live in. Then make a list of the things we like to have, but don’t necessarily need to live – toys, candy, and Paw Patrol slippers.
- You must make decisions about how you will spend your money. There are trade-offs, and the money can run out. Give them some money with the task of choosing the snacks they buy during the week. Do you want to spend money on something, or can you borrow it or buy it somewhere or at a lower price? Once it is spent, it is gone.
- It is good to compare prices. Explain that there are a lot of ways to buy things. You can actually go to a store to buy it, look it up online (maybe via the magical land of Amazon) or buy it used from someone else. They can help you peruse coupons or wait for sales to get better prices.
Ages from 11 to 13 years
- You must save at least one cent for every dollar you earn. Encourage the habit of saving 10% of all the money your child receives. Have them set goals for the things they want to save for.
- Use a credit card like a loan. Most likely, they watch you use cards all the time and may have questions about it. They need to understand that this is actually a financial transaction that is taking place and that the money is running out.
Ages from 14 to 18 years
- You should avoid using credit cards if you cannot pay the balance each month. They need to understand that if you don’t pay the bill in full each month, the 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 graduating from college and getting your first full-time job. Explain what you pay taxes 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 – broken devices, job losses, medical issues and how having a savings pad helped you get through these times. Alternatively, talk about how you regret not having an emergency fund when you need it.
- Basic investment concepts. If they are earning an income, you might consider setting up a Roth Individual Retirement Account for them and talking about basic investing concepts so they can get some hands-on experience watching their money grow.
education is power
Here are some additional tips for parents:
- Provide real-time examples of the tradeoffs you make. When you’re in the store with your kids, compare prices together and tell them why you chose one item over another. Talk to them about something you saved and how long it took you to do it.
- Use the wildcard as a learning tool to create teachable moments. We need to put our kids into scenarios where they make and manage their own money before they go out in the real world. Let them spend the money they earn and help them set goals to save bigger items. If you’re 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 recognize the cost of these items.
- Let your children 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 their $10 bundle of Pokemon cards, or did they just end up in the Recycle Bin last week? Congratulate them on the purchases they made the most of or saved for. Let them practice and fail and learn how the real world works. You want them to learn and make mistakes while they’re still under your roof.
- By the age of 14, start “reality” training. Take the amount you normally spend on them for entertainment, clothes, 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 the first week and don’t have the money to go to the movies with friends later, they’ve learned the lesson that money is limited, 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 engage in the behavior early on, it’s best if it continues.
Kids who grow up with a good education about money and healthy habits will grow up to be adults who are less likely to fall into a cycle of serious debt, are better prepared for emergencies and have the surplus to give to charity and support their communities.
– by Jamie Boss, Certified Financial Planner at Aspyre Wealth Partners