There was a time when financial literacy for children was pretty simple. Counting and saving pennies in a piggy bank, which could be raided for an occasional treat, went a long way toward teaching kids what they needed to know about managing money.
Today, finances are not nearly so concrete. They’re characterized by highly abstract notions like credit and interest, and by transactions that occur invisibly and magically over the Internet. Teaching your child about the value and management of money—especially money they can’t see and touch—is more complex, yet, perhaps more critical than ever before.
A 2013 article in Forbes Magazine cited “The 5 Most Important Money Lessons to Teach Your Kids” and provided a jumping off point for the discussion below.
On budgeting: Beyond identifying types of money and their associated value, even the youngest children (beginning at age 3) can learn to budget. Provide jars labeled “Save,” “Spend” and “Share” and have your child divide his money among the three. This allows him to think ahead about how to spend and promotes the habit of setting funds aside for future uses (therefore teaching deferred gratification), rather than spending it all right away. When he gets older, have him use envelopes or bank accounts to divvy up his loot.
On choosing: Shopping trips are great times to teach children about making choices. Help your elementary school-aged child understand that if she spends all her money on a doll, she won’t be able to buy an arts and crafts kit, too. Are there two things she can buy for the same amount she would have spent on one? (This is a great opportunity to sneak in some math and analytical thinking, close cousins to financial literacy.) It’s important to resist the urge to buy additional things your child wants but can’t “afford.” Otherwise, she won’t experience what it feels like to make choices.
Savings and interest: Older children can and should begin to tackle concepts that are more mathematically sophisticated. Plug in some figures on the Investment Calculator tool, which can be found at Investment.gov, to see how compound interest and regular contributions “grow” a savings account over time. The exercise may inspire your child to save early and contribute often. Having a specific goal to save toward, like a new skateboard, car or college fund, can also be motivating.
Credit cards and interest: Navigating the world of credit card and other debt can be more challenging but is also incredibly important. As plastic and electronic devices have largely replaced using coins, bills or checks, spending may not even seem very real to your child. But the impact of accumulating debt that outpaces his ability to pay can quickly become a huge burden. According to one source, the average American household’s credit card debt last year was $5,700, but the nearly 40 percent of households who carried debt month-to-month owed more than $16,000. Ensure your older child understands how credit card companies charge interest and how it compounds when balances are not fully paid each month. A pair of shoes that cost $50 could cost $200 or more by the time the “principal” (or original charge) and accumulated interest is paid.
Other types of borrowing: At the same time, borrowing to finance certain big-ticket items like higher education or a home may be unavoidable. So, while children should be wary of debt, they must also know how to borrow responsibly. Talk to your child about how interest works on a loan as opposed to the “revolving” debt of a credit card. Look at specific loan scenarios, including total time to pay off the loan, projected monthly payment and how much total interest would be paid over the life of the loan. Armed with information, your child may be more motivated to defer or save up for bigger purchases. When your child does borrow, encourage him to shop around for the best available terms. Studentaid.gov contains a lot of good information about student borrowing and other types of financial assistance.
At the end of the day, it may be most important to remind children that, in small and large matters alike, what may seem like a “need” may actually be a “want,” and that “wants” can be deferred or perhaps satisfied through less expensive alternatives. Once they become adept at knowing the difference, children and teens are in an infinitely better position to make good financial choices and to have more funds available for what is most important.
- How to Teach Kids About Money, from Toddlers to Teens
- Financial Literacy: Teaching Resources for Parents and Teachers
Margaret Nicklas is an Austin-based freelance journalist, writer and mom.