Good financial decision making starts in childhood and follows you through adolescence, college and into your adult life. Parents who teach their children the fundamentals of money management, budgeting and making prudent financial choices are providing them with a sound financial foundation.
However, teaching money skills early in life can often fall by the wayside because it is not exactly exciting. The disadvantage to this is that by the time kids are starting to make their own financial choices, they have not been given the tools to avoid mistakes and weigh their options responsibly. One of the most impactful ways to encourage informed financial decisions is to lead by example.
Children absorb everything they see so if you conduct yourself in a way that demonstrates self control and prudence in the way you make, save, invest and spend money, your children will certainly have a strong foundation to start with. (For more, see: Teaching Financial Literacy to Kids.)
Understanding Financial Concepts at Different Stages of Childhood
According to the Consumer Financial Protection Bureau, children in elementary school should have a firm grasp on the fundamentals of saving, spending, investing and borrowing. At this stage children may also be able to assert some knowledge in concepts like compound interest, the consequences of financial risk taking and the fundamentals of budgeting.
When children are in middle school they should start learning the basics of the stock market, interest rates, borrowing, inflation and tax obligations.
By the time they reach high school, students with advanced knowledge of how financial decisions impact their lives with regard to investing, saving and spending, the impacts (both positive and negative) of taking financial risk, how income and taxes relate to one another and what types of insurance offer different kinds offer protections, would be considered well equipped to begin making independent financial choices.
Teaching Your Children
That may seem like a tall order for many parents, but there are ways to incorporate these technical lessons into everyday life through experiences that shape their understanding of the financial concepts without necessarily knowing them by name. By explaining these concepts with examples and in more simple terms, children and teens might be able to grasp the concept and perhaps enjoy the additional questions that might arise from understanding a new idea.
The idea that people work for money may be novel to most children. So lessons about money often start with chores. Kids can learn that by doing work they can earn money and that they can use the money in different ways. It’s important to establish this connection between work and money and sow the seeds for a strong work ethic early in life.
In this modern day of technology, it should come as no surprise that “there’s an app for that.” Indeed, there are a whole bunch of them. A few that have received positive reviews from parents and educators are iRewardChart, ChorePad and iAllowance. (For more, see: 6 Finance Books Every Child Should Read.)
As kids grow up, they get more expensive, but they also have more opportunities to work and earn money. They ability to earn can encourage them to save for the things they want. Additionally, earning a paycheck can demonstrate the difference between gross and net income.
As kids advance in their teenage years and begin considering college, there is a great opportunity to include them in the financial discussions you will undoubtedly have regarding applications fees, tuition, housing and living expenses. Most college students get their first direct lessons in the borrowing process at this time and parents who include their children and help them navigate the loan application process and explain how and when the loans will need to be paid back are doing themselves and their children a good service.
Once out of college, some young adults move back home because they cannot afford the cost of living on their own. If provided with resources and information early on, they might have made planning considerations prior to choosing a career or making a move based on the budget that they knew they were going to have to stick to.
Avoiding the Burden of Debt
Once young adults leave college they will likely be inundated with credit card offers that will tempt them to spend money they don’t have. The most essential tool for someone living on their own for the first time is a household budget. This financial framework can help your child avoid overspending, understand the consequences of their actions and prevent them from living beyond their means. Creating a budget can be something you do together with your adult child and sharing your own household budget can help them see all of the expenses that need to be considered.
The Long-Term Benefit of Financial Literacy
Teaching financial literacy from a young age can prepare your children for the real world and provide them with a solid foundation upon which they can make independent financial decisions that are responsible. Like any long-term investment, the reward of these lessons will be demonstrated in the future. Once they are grown and able to plan for their own financial security, you’ll know you have done a great thing. (For more, see: Why Financial Literacy is So Important.)