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We live in an economy that depends on capitalism, and we are the consumers powering our own economy. The rational side of us knows it’s critically important for our children to learn the basics of saving, investing and spending money, yet we still manage to raise kids who sometimes don't understand how to thrive in our economy.
No parent wants to toss their children into the water and hope they’ll figure out how to swim. But when it comes to money, plenty of young adults can’t keep their heads above water. They could have learned that at home; many American adults don’t do a smart job of managing their money either.
How Financially Unfit Are We?
The FINRA Foundation found in its most recent (2015) National Financial Capability Study:
- Only 40% of adult Americans said they spend less than they make, while 38% break even and 18% spend more than they make.
- 50% have no rainy-day savings to cover even three months of unexpected financial emergencies.
- 63% of respondents flunked a basic five-question financial literacy test.
Parents or Teachers: Whose Job Is It?
Parents tend to believe their children will learn these vital life lessons in the classroom. Not so. Last year Champlain College's Center for Financial Literacy found that only five states are rated an "A" grade in teaching their students the basics of budgeting, borrowing, paying bills, building credit and investing. Utah was the only state to earn an A+ on its 2015 National Report Card on State Efforts to Improve Financial Literacy in High Schools, and only Virginia, Missouri, Tennessee and Alabama received A's. Twelve states flunked the test entirely.
The Council for Economic Education's 2016 Survey of the States shows that only 17 states require some sort of personal finance class in high school. The organization added that students in the states that require some high school education on finance are more likely to show positive financial behaviors than their peers living in states that don't require any classes on finance. For example, college students in these states are more likely to be savers and pay off their credit cards in full every month. Students in the states requiring a finance class are also less likely to be compulsive buyers.
Parents Are the Teachers
With so few states teaching personal finance, most teachers aren’t trained to teach money courses and most 18-year-olds don't leave school knowing, for example, how credit cards work. Until that changes, it is up to parents to fill this gap and take up the burden of teaching their kids about money.
Parents don’t need to be experts on how to manage money or invest it, but they can share their own hard-knocks lessons. Kids can see when parents are stressed about finances, and they also tend to imitate parents’ financial behaviors. By giving them simple examples of how day-to-day living expenses are met – and how credit cards are used – children as young as seven or eight can grasp these basic concepts of managing cash flow. And there's a side benefit: Finding the words to explain money to your kids can be a good impetus to learning more about it yourself. (Investopedia's tutorials Teaching Financial Literacy to Kids, Teaching Financial Literacy to Tweens and Teaching Financial Literacy to Teens are good places to start.)
These are five essential steps that parents at any income level can take to start teaching their children about money.
- Talk about money at home. Show them how bills get paid each month, including the electricity, gas, and utility bills. Explain how much it costs to have internet, a cell phone, and cable TV. Show them how money comes in from where you work and then how it goes out.
- Teach the concept of paying yourself first, as if you're one of the bills you pay. Explain that you need to save and you can't spend all of your money.
- A child who is old enough should get a prepaid funded card. This will help him or her start learning how to use money in the real world. A colleague of mine gives PayPal cards to her two granddaughters, ages 7 and 11, and loads a set amount of money onto the cards every week. One of the girls has already saved up thousands of dollars on her card at this point because she just doesn't want to spend it. Her other granddaughter is spending all her money, but she’s learning early that she only has a set amount of money to spend and can't go over that
- Introduce your kids to the concept of investing by age 12. In season two of our PBS show “MoneyTrack,” we introduced the story of Damon Williams of Chicago, who at the time was 14 years old and had already accumulated a stock portfolio worth $50,000. You can watch his story with your child here on YouTube. Damon, a basketball player, explains how he got started investing all because he wanted to buy a pricey pair of Nike basketball shoes.
- Take advantage of the teaching opportunities in everyday situations. Simply saying you can't afford to buy something does not help kids connect the dots. Instead, show them your online bank statements and how you pay monthly bills, and explain in commonsense language how funds flow in and out. This is why we choose not to afford to buy something.
If you use a financial advisor to help you with your own investments, introduce your advisor to your children. He or she can explain his role and emphasize key concepts like compound interest and why it is such a powerful motivator to jumpstart savings right now.
Money Habits Start Very Early
Keep an eye out for those funny little money-related habits, which will begin emerging by the age of six. Some kids seem like natural penny-pinchers, so nurture that and begin teaching them from an early age how to handle money. A colleague of mine began teaching his son at the age of about 12, and now the young man is 17 years old with $30,000 in an account.
Some kids just aren't interested in money and don't care when you show them that their bank account is growing, but don't ignore them either. Just try to teach them the very basics as best you can and look for an opening, as Damon's mother did.
Pam Krueger is the founder of "WealthRamp," co-host of "Money Track" on PBS and national spokesperson for The Institute for the Fiduciary Standard.