“Nearly half of our young people don’t understand how to save and invest for retirement, nor how to handle credit cards. They don’t know the difference between inflation and recession, music CDs from bank CDs, nor how government spending affects them. If we fail to act now to improve economic literacy in this country, our children will be at risk for crippling personal debt, costly decisions at work and at home, and lack competitive skills in a fast-paced global economy.”
The National Council on Economic Education
Money and sex are hot topics among teens, yet they are the least embraced in the home and school. A recent international survey of 15-year-olds found that 18 percent could not answer basic financial questions or handle simple fiscal tasks. Although the call for more school-based finance courses is on the rise, parents remain a child’s first teacher. If we want our kids to enter the adult world financially (or sexually) literate, we need to initiate and welcome these discussions.
Because our financial lives are virtually cash-free with direct deposit, online/auto pay, credit cards and debit cards, kids get the idea that “swiping a card” will get you whatever you want. In my finance course for teens it always amazes me how little kids know about money, its history, its purpose, and its potential undoing.
As parents and teachers, one of the best things we can do for our youth is to prepare them for independence. Instilling fiscal intelligence in your child — money management, hard work and philanthropy — is priceless. Want a financially savvy child? Try these methods.
Set a good example
Your child sees everything you do, inclusive of spending, saving and managing finances. When you set a good example by showing financial discipline and insight, your kids will establish long-lasting positive economic habits.
▪ Children tend to copy what we do rather than what we say, so limit the amount of shopping trips as entertainment — this implies that money is an unlimited resource and that spending is fun.
▪ Many parents lie about money. Kids may learn that lying is a good way to cover up financial problems, or that lying about money is acceptable. If your child asks a financial question that catches you off guard, be honest and say you don’t want to talk about it.
▪ Model financial core values. Simply, we need money to buy things but we need to earn the money before spending it — and we often have to wait before spending it.
▪ Things you want are different from those you need. Limiting random purchases by not giving in to every request is a great technique. It is OK to say no! We hear it as adults — whether from an employer or the bank — and kids need to hear it too.
Educate them on finances
Discuss choices before spending and compare prices before you buy. Visit a bank, explain compounding. Visit the vault — If I remember anything about banks, it was the amazing feeling of stepping into THE vault as a child.
Let your child partake in fiscal tasks such as preparing deposit slips, writing a check to pay bills or balancing the checkbook. Use a personal financial software such as Quicken to show kids how to manage money. Take them with you when you shop and when you need to return. Include them in appropriate finance discussions. Find a meaningful charity your family can support. This demonstrates the importance of balancing the act of giving with receiving.
In addition to great finance websites, there are amazing children’s books on money for all ages. Find one and read it together.
Teach with the cards
When a child sees the whole picture associated with the “buy now pay later” system (budget, decision, purchase and payment at month’s end), they will learn the importance of spending only what can be paid when the bill comes in — or be faced with significant interest charges/fees. They need to know that when you defer payment, you can end up paying $20 for a $5 item. Distinguish credit from debit cards — that’s a big one. A prepaid debit card is a great way to test the waters of responsibility when the time is right.
Give an allowance
It is crucial for kids to see the many roles of money in a person’s life — spending today, saving for tomorrow, or giving to the less fortunate. An allowance can teach kids about money management.
An age-appropriate weekly allowance should be given in small bills. This allows them to compartmentalize it (spending, saving, investing and donating) and make it more real.
When kids have their own money and can make choices about that money, they learn to deal with the consequences of their actions. By experiencing negative consequences first-hand, they will learn to make smarter financial decisions. Mistakes are crucial.
Instill the art of saving
Due to the amount of spending in this country, there is an overall negative savings rate. Saving a portion of their allowance promotes great financial discipline. Discuss your own short-term versus long-term savings goals and help them see how much you have to save each week to pay for something.
Open a savings and/or investment account
Anytime is an opportune time to open a custodial savings account for your child. An older child can participate in making deposits and withdrawals, and review online bank statements with you. When your child demonstrates fiscal discipline, you might consider matching or adding to his/her savings.
Explore the services or products used in your home and who makes them. Do some research together about the companies and, if it’s possible, open a brokerage account to allow your child to invest in either a mutual fund or an individual stock (remember investments carry risks). Together you can follow the progress of the investment. That’s a great time to introduce them to newspaper’s business section.
Talk about your family’s budget and how to keep track of expenses. The idea that a person’s living expenses should fit within their earnings can be a challenging concept. One of my favorites is discussing the implications of making $1 million and spending $2 million. Either way you cut it, everyone needs a budget.
Shopping with your child is a great opportunity to talk about the relative prices of products and their value. Why does one item cost $1 more than the other one? Is the extra cost worth it?
Kids who work to earn money develop a better sense of financial responsibility and are better prepared when it comes the real world. When teens work part-time, the money in their pocket is given more consideration before it is spent.
Make it an honest and long-term conversation
Kids who learn basic principles of earning and saving money, needs versus wants, costs and budgets, will be more prepared for more complex adult issues such as mortgages, credit cards and interest rates. Introducing solid financial principles early provides a real world platform from which to start.
Be prepared for the questions. How much do you make? How much is our house worth? Do you have debt? What should you say and not say when kids get personal? Although the first and most common reaction is “none of your business,” offer instead a response that satisfies the question, such as “enough to pay our bills and buy the things we need.” If asked about debt, instead of sharing the unsettling facts of your family debt, teach kids about debt in general, and ways to try to avoid or manage it.
If asked why other people have things that they don’t, explain that every family has its own priorities and values. By emphasizing what your family does will help your child focus less on what others do.
At the end of the day, when the money lesson is all done, remind your kids that in the end, you’re not rich until you have things that money can’t buy.
Laurie Futterman ARNP is a former Heart Transplant Coordinator at Jackson Memorial Medical Center. She now chairs the science department and teaches gifted middle school science at David Lawrence Jr. K-8 Center. She has three children and lives in North Miami.