How Parents Can Empower Their Children Through Financial Literacy
The Covid-19 pandemic has really highlighted how financially troubled our society is. Debt levels are extremely high, bankruptcies are common, and many Americans are living paycheck to paycheck. Today’s adults are hurting and also risk causing trouble for the next generation.
The fight against America’s financial literacy crisis begins at home, as financial education classes are still not consistently taught in schools across the country.
Yet, according to a Study by T. Rowe Price, 36% of parents are “very” or “extremely” reluctant to discuss finances with their children, and 26% say they are “somewhat” reluctant. As a result, children today have no idea about money or how it works.
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Despite this reluctance, it’s important for parents to start the conversation about money at home with their children. That said, here is a basic guide to financial concepts that you can discuss with children of different age groups.
- You need money to buy things. You can tell them about the different forms of money we use – coins, dollar bills, and credit and debit cards. Ask them to consider all the things that cost money – toys, groceries, their backpack, etc. Also explain that many things of value are free. Spending time playing with a friend or cousin is really fun and doesn’t cost a penny.
- Money is earned by working. Talk about your job or profession and why you chose it. Use examples of jobs they recognize such as teachers, firefighters and letter carriers. You can discuss with them ways they could think of to earn money.
- You may have to wait to buy something you want. Delayed gratification is a difficult concept to understand, even for many adults. The earlier children accept this fact, the better. Ask them to identify an item they would like to purchase. Maybe it’s a toy or candy. Talk about the price and help them count the money needed to buy it.
- There is a difference between what you want and what you need. Talk about all the things we have 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 on – toys, candies, Paw Patrol slippers.
- You have to make choices about how to spend your money. There are compromises and the money may run out. Give them 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 second-hand or cheaply? Once it’s spent, it’s gone.
- Good to compare prices. Explain that there are many ways to buy things. You can physically go to a store to buy it, look it up online (perhaps through Amazon’s magic land), or buy it used from someone else. They can help you browse coupons or wait for sales to get better prices.
- You should save at least a penny for every dollar you earn. Encourage the habit of saving 10% of all the money your child receives. Ask them to set goals for the things they would like to save 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 that it is actually a financial transaction and money is coming out.
- 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 full bill 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 much closer to having their own credit card.
- You have to pay taxes on your income. This is an important concept to understand long before they graduate from college and get their first full-time job. Explain what taxes pay in your community.
- The importance of having an emergency fund. Give examples of why it is important to always have some money in savings. You can name examples of emergencies you’ve experienced – broken appliances, job loss, and medical issues and how having a savings cushion helped you through those times. Or, talk about how you regretted not having an emergency fund when you needed 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 hands-on experience watching their money grow.
Here are some additional tips for parents:
- Provide real-time examples of the trade-offs you make. When you’re at the store with your kids, compare prices together and tell them why you’re choosing to buy one item over another. Tell them about something you saved up for and how long it took you to do it.
- Use the allowance as a learning tool to create teachable moments. We need to put our children in scenarios where they are earning and managing their own money before they are in the real world. Let them spend the money they earn and help them set goals to save for 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 get an idea of 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 what they think. Are they still enjoying that $10 Pokémon card pack, or did they end up in the trash last week? Praise them for purchases they’ve used a lot 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.
- At age 14, start training “in the real world”. Take the amount you would normally spend on them for entertainment, clothing, and other necessities and put it in their checking account each month and let them handle it. If they spend it all on a pair of designer sneakers the first week and have no money to go to the movies with friends later, they have learned the lesson that money is limited and they owe better handle it 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 anchor a behavior from the start, the better it will stick.
Children who grow up with a good education around money with healthy habits will grow into adults who are less likely to get stuck in a dangerous cycle of debt, are better prepared for emergencies, and have extra money to give to charities. charities and support their communities.
– By Jamie Bosse, Certified Financial Planner at Aspyre Wealth Partners