It used to be that kids went to school to learn reading, writing and arithmetic (aka: the 3R’s). More recently, the focus has been on STEM (science, technology, engineering & math) to better prepare students for the world we live in. And while I agree that these are all important subjects for kids to learn these days, I also think they need to learn another set of skills that they will all actually use the rest of their lives: personal finance.
Since a lot of schools don’t teach this subject, that responsibility then falls to parents – and they often don’t feel equipped to talk about it. A 2015 study by T Rowe Price revealed that 72% of parents feel reluctant to talk to their kids about money, and 75% think personal finance ought to be a required subject before kids graduate from high school. Until that happens, parents would do their children – and themselves – a great service by teaching them these important life skills -lest they end up as “boomerang children” - per my previously published article, which you can read here.
Here is a checklist of concepts every parent should try to teach their kids, what to tell them and by what age to do it:
- Saving(s): Age 4+
Probably the most important concept of all: how to delay gratification for a larger goal. Explain to kids it’s OK to not use all of your money right away, and enforce that with a simple exercise: try giving your child two pieces of candy, letting them eat one now and having them save the other in a special place. Do this daily, and show them after a week or two how regular “saving” in this way adds up to something big.
- Budget: Age 8
Teach your children that a budget is a plan to keep track of your money. Illustrate this with three jars or piggy banks: one for spending, one for saving and one for giving.
Every time your child earns money, have them allocate their money between these three jars. While they may use the contents of their “spend” jar right away, explain that the “saving” jar is for longer-term goals and that the “give” jar is for helping others. It’s a great way to instill charitable thinking – especially if you give them the freedom to choose where to donate their money. Absent any other goals, conventional wisdom suggests 10% of earnings into each of the “saving” and “giving” jars.
After this practice is established, involve them in the family budget. Have them help you develop a spending plan for an upcoming vacation (food, travel, lodging, entertainment, etc.) and ask them to keep track of the family spending – even for a day. It’s a great way to get them to appreciate what things cost!
- Loan: Age 8
Most kids understand the concept of a loan because they have probably lent something to a friend or sibling that they expected to get back. Explain to your kids that this also happens with money, especially for big purchases like a house. The most important concept to teach them about loans is that the borrower is responsible to pay the money back – usually with interest (see #4 below) and they very well may have loans in the future to buy a car or help pay for college. Let them know another word for having several loans is “debt,” which is not a bad thing – as long as there is a repayment plan in place for all of it that the borrower follows.
- Interest: Age 8-10
Explain that interest is something you often pay when you owe money and are trying to pay it back over time. It’s also something you can earn when you lend money to someone else. You can demonstrate this to younger kids by borrowing money from their piggy bank and paying it back to them the next month with interest. Older kids who understand percentages can be shown a credit card statement and asked to calculate the cost of interest on a balance of $5,000 - $10,000 versus paying off the balance right away. Be sure that if you lend them money to make a purchase, you come up with a repayment schedule (with interest) they agree to – and make sure they stick to it!
- Credit Cards: Age 8-10
Kids need to be taught that credit cards are used to make purchases you will pay for later, and while necessary to have, they should mainly be used to buy things they can afford to pay back within the next 30 days. Explain that if you don’t pay off the credit card balance each month, the credit card company will charge you interest, and the longer it takes you to pay it back, the more money you will owe in the end. Parents should also explain how a debit card is different, as it takes money directly from your checking account at the time of purchase, which they will need to keep track of right away.
- Taxes: Age 10-12
Children should understand that taxes are payments that go to the government for the work that it does, such as operating schools and fixing roads. They are most commonly taken from a paycheck and (in theory), the more you earn, the more taxes are taken out. A good way to demonstrate this to kids is to “tax” their allowance: take a percentage of their allowance away before you give it to them and put it aside in a “family savings” jar to use for a household expense.
- Investment: Age 10-12
The best way to explain this term is to describe it as something you spend money on with the goal of making more money over time. You can demonstrate this to younger kids by matching a small amount of their savings each month (e.g. add a quarter to the savings jar for each $10 they set aside each month or week). After a few months/weeks, they can start to see how this adds up and the benefits of staying invested. Kids should also be taught, however, that some investments can lose money, and that it’s important not to put all of their money in one risky investment, or they could lose it all.
- Stock: Age 12+
Tell your kids: when you own a stock of a company, you own a small piece of this business. Every stock has a price that can go up or down, depending on what’s happening at the company (for starters). Illustrate this with a company they know. Imagine they bought one share of Apple stock for $5 and the company sold twice as many iPhones this year. That stock price might go up to $8, making a $3 profit on the investment. However, imagine also that Apple sold half the number of iPhones and the stock price fell to $2. That would mean a $3 loss.
Explain to your almost-teenager that most people don’t own a single share of stock but tens, hundreds or thousands of shares. And good investors also own the stocks of several different companies. Stocks can also pay dividends, which means they are sharing their company profits with their stockholders. Learning about stocks can be particularly fun as kids get older. There are a lot of great online games they can use to create “virtual” stock portfolios, illustrating how stock prices move and how much money they would have made or lost if they been investing with real money. Go to: http://mashable.com/2010/10/22/stock-market-games/ for a short list.
- Credit Score: Age 15+
Once you plan to give your child use of a credit card, you must explain what a credit score is: a number calculated as a measure of how likely someone is to repay his or her debts. This is done by businesses known as credit bureaus. The goal is to have a high credit score: basically more “likes” by the credit bureaus. The way to do this is to have a long history of paying your bills on time. When you don’t pay your bills on time or you have too much debt, your credit score gets lowered. Tell your kids that a good credit score will help in the future if they want to borrow money to buy a house or a car. A bad credit score can make it tough to borrow money.
While there is value in letting kids learn from their mistakes – even financial ones - parents should try to educate their children as much as possible to make good financial choices by regularly discussing money, providing guidance, and using the real-life experiences to reinforce the concepts they need to know. The complexity of today's world requires a good understanding of these basic financial concepts, in order to save and spend wisely.
At SRQ Wealth Management, helping our clients teach their children to be good stewards of their financial legacy is one of the many conversations we often have. If you need more resources to help your children get a good financial education, feel free to give us a call.