If a child received a string of failing grades in math class, or could only properly comprehend what they were reading less than 50% of the time, they would likely be facing some pretty dire consequences. Yet, when a national survey tested high school students on basic financial knowledge, the average score was dismal – 48% to be exact.
So what was done to remedy this obvious lack of basic financial understanding? Nothing. Why? Because while we routinely see young adults rack up credit card debt and fail to plan for their financial future, we haven’t yet made a connection between the reality and what caused it – a lack of education in this essential area of our lives.
Luckily, April is Financial Literacy Month, so in an effort to spread the word about the importance of understanding money and everything that comes with it, let’s start with what knowledge kiddos should acquire between the tender ages of 1 and 18.
Step 1: Things Cost Money and Money is Earned
- Start discussing coins and their value. Allow your children to watch you pay for purchases in cash or allow them to put coins in a parking meter.
- If you are considering giving an allowance, have a conversation about specific chores and what their monetary value would be.
- When you’re out with your child, point out what people do for a living – waitresses, truck drivers, police officers. Explain that they are getting paid for what they do.
Step 2: Not Everything Can Be Bought When You Want It
- Start a piggy bank for your child. Explain that they have to wait until a certain amount is in the piggy bank before they can buy what they want. (The MoneySavvy Piggy Bank even allows kids to save for different purposes.)
- Point out other times that we have to wait before we can get what we want – at restaurants, before holidays, etc.
For Me, For You, For Later
Step 3: You Have to Choose How and Where to Spend Your Money (Not Everything is a Need)
- Use a trip to the grocery store to describe the difference between a “want” and a “need” – i.e. vegetables vs. cookies.
- When your child is saving for something, take them to different stores to compare prices. Let them know that research can help them save money
Step 5: Creating a Budget Will Keep You from Spending More Than What You Have
- Sit down with your child and give them a simplified version of your budget. If talking exact amounts makes you uncomfortable, give percentages. Give them a better understanding about how much it takes to run a household.
- Instead of buying clothes or giving your child lunch money every day, include this money (or a portion of this money) into their allowance and have them create a budget for themselves. If they don’t follow their budget, they must deal with the consequences.
Step 4: You Must Plan for the Future (Saving is Essential)
- Encourage your child to save by matching what they put away every month into their own savings account.
- Explain how interest can help them increase the power of their money.
- If your child is old enough, explain compounding interest in relation to retirement. If they have a job, compute how much they could retire with if they started saving now.
Step 5: Credit Cards Are a Loan, Not Free Money
- Let your child see how long credit card debt can take to pay off by playing with this Credit Card Repayment Calculator.
- Explain that if you can’t afford to pay what you charge every month, you are essentially taking out a loan.
- Take one purchase and see what it would cost after months (or years) of interest charges. Ask them if that item is actually worth the inflated price.
Step 6: Your Decisions Now Could Affect Your Financial Future
- Explain what a credit score is – what affects it and how it can determine how much you pay for future purchases.
- Start talking college and student loans. How much will the college of your choice cost? How much will they need to take out in student loans and how long will it take to pay back?
- If they plan on buying a car, or they are now in charge of taking care of one given to them, talk about the total cost of owning and maintaining that vehicle.