If there's one subject that has the ability to impact kids throughout their entire lives, it’s personal finance.Unfortunately, it’s a subject that no one wants to teach them.
“The practicality of teaching [finance to kids] is so important…it’s the one topic that they’ll actually use for the rest of their lives, everyday. But it’s the one topic that isn’t really taught,” says Gregg Murset, chief executive of My Job Chart, an online tool that teaches kids about responsibility, managing money and helping charities.
Because most schools aren’t teaching finance, the responsibility falls toparents. But many parents are reluctant to broach the subject, often because they don’t feel qualified or they think talking about moneywill make their children worry. In a recent study72% of parents reported atleast some reluctance talking to their kids about finance. But thatdoesn’t mean they don’t want their kids learning it -- 91% believe it’s appropriate for kids to learn about financial matters in school and 75% said there should be a personal finance requirement to graduate.
Teachers agree -- in a separatestudy89% saidstudents should take a financecourse or pass a competency test for high school graduation -- but only29% of teachers are actually teaching it. There's been some progress getting more public schools to make courses mandatory, but it's far from being a standard part of school curriculum, which means the onus ison parents to ensure their kids have, at the very least, a basic financial understanding.
The following is a list ofterms that experts say every kid shouldlearn. It includes the age at which kids can generally being to understand the concept as well as anage-appropriate explanation that parents can use. (Even if your kids are into their teenage years,it's never too late! Go through the list to make sure they have a good understanding of each term.)
1. Saving(s): Age 4+
Saving is one of the best topics to introduce at a young age. It’s easy for kids to grasp and can have a huge impact on thosewho embrace itearly. “Saving means not using all of your money right away, but instead putting it aside for later,” says Stacy Francis, president and chief executive of Francis Financial.
There are plenty of examples parents can use to illustrate, here's one: Start by giving your child two small pieces of candy during the day. Letthem eat one right away and save the otheruntil after dinner. Then each day for a week, givethem two pieces but have them save one in a special place. Whenthe week is over, they'll be excited to have abag full ofcandy.Explain thatsaving money works the same way -- when you regularly puta little bitaside, in time it will add up to something big.
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2. Budget: Age 8
A budget is plan that you make to keep track of your money and where it is going. One great way that a lot of parents teach kids how to budget is with "give, save, spend jars.” Whenever the childearns money they divide it between the jars. The “save” jar is moneythat's intended for a longer-term goal; money in the “spend” jar can be used any time for smaller purchases; the “give” jar is money that will go to acharity of their choosing. The give jar, in particular, is great for getting kids to thinkabout helping others while allowing them the freedomto choose where to donate theirmoney.
Niv Persaud, founder of Transition Planning & Guidance says it’s also a good idea to get kids involved in the family budget, or “spending plan” as she calls it. “Involve your kids in developing a spending plan for an upcoming vacation. Let them see how you budget and save for these memorable trips. Start with small tasks and as your kids grow, expand their role. Once you’ve selected a destination, ask them to calculate how much you need to save for travel, food, lodging and entertainment. When you’re on vacation, ask them to keep track of spending.”
3. Loan: Age 8
A loan is something that is borrowed, often money, which has to be paid back with interest (See #5 below). Most kids getthe basic concept of a loan because chances are, at one time or another, they’ve lent something to a friend or sibling and expected to get it back.
Start by explainingsome of thereasons peopletake out loans. For instance, because it costs a lot of money to buy a house most people borrow money (take out a mortgage) to pay for it. Even kids know that $300,000 is a lot of money, so when they hear that’s the average price of a house they can understand why most people borrow money to cover it. Car loans and student loans are also good ones to discuss – especially thelatter for kids who will be taking out student loans to pay for college.
While taking out a loan isn’t a bad thing, parents need to stress that when you do take on a loan, it'syour responsibility to pay it back.
4. Debt: Age 8
Loans and debt can be explained together. Like a loan, a debt is money that you owe someone that needs to be paid back. Once again,a mortgage can be a good way to illustrate how debt works. (Other types of debt, such as credit card debt, canbe introduced a bit later on -- See #6)
Murset saysparents should discuss their own mortgage with their kids by explaining that they borrowed money – took on debt – to buy their house and that they need to pay it back a little bit each month. He adds, it’s critical to show the kids the mortgage statement so they can see how much is paid each month andthe interest. That way they can see the cost associated with debt and that it never goes away until it’s paid off. Murset says, "kids need to understand that once you have a debt, it doesn’t go away until you’ve taken care of it.”
5. Interest: Age 8-10
Interest has two sides: it's either something you paywhen someone lends you money or something that you earn when you lend money to someone else.Elizabeth Grahsl, Vice President of Prosperity Bank says, you would earn interest if, for example,“your sister runs out of her allowance but needs money this weekend. You could lend her $20 but charge her $2 in interest, which she will have to pay you back next week.” You can also make it intoa game to illustratehow it works: Ask to borrow a few dollars from your child's piggy bank and then set up aschedule to pay it back over the next month with interest.
Grahsladds, “explain to older kids how you pay the bank interest on your car loan or mortgage each month. Also point out that the bank pays you interest on deposits you gave them."
Whenkids are older and cancalculate simple percentages, have them do some math to see how interest adds up. Show them a credit card agreement that charges 15% interest and have them figure out how much extra money you would have to pay to carry a balance of $5,000 or $10,000 on your credit card, versus if you paid it off right away.
6. Credit/Credit Card: Age 8-10
Credit lets you buy something without having topay for it right away. For example, if you use a credit card to buy a new bike that costs $200, the money doesn't come out of your bank account. Instead the credit card company pays for the bike. Then they send you abill and you have to pay them back the $200. If you don't pay them back right away, they will chargeyou extra money (interest).The longer it takes you to pay back, the moremoney you will owe in the end. While credit cards are necessary to have -- you can't buy a sandwich on a plane without one -- kids need to understandthatthey should only be used to buy things thatthey can afford to pay off right away.
Ifyou'reat the store with your child and theyforget theirmoney but they absolutely have to have that specialtoy, let them borrow the money, say $10. Tellthem, however,that they have to pay you back right away when you get home. If they don't, start adding on interest and continue to until they've paid you back.
Parents should also explain how adebit card is different as it takesmoney directly from your checking account. Murset suggestsreferringto debit cards as "money suckers."“When you’re at the store and you slide the debitcard, explain that the card is sucking the money right out of your account at that very moment.”
7. Taxes: Age 10-12
Chances are most kids know the wordbut few understand what taxes are. Here’s the explanation: Taxes are payments that go to the government for the work that it does, such as improving schools and fixing roads. They'retaken rightfromyour paycheck and the amount you pay depends on how much money you make.
Jeff Nauta, Principal with Henrickson Nauta Wealth Advisors says, “A great way to teach kids about taxes is to apply a tax to their allowance.” Sorather than giving them theirfull allowance each week, take away a percentage and putit in a family jar to be used toward ahousehold expense.
You can also explain to older kids that doing certain things, which have a positive impact such as donating money to charity or installing solar panels on your house, can lower your taxes.
8. Investment – Age 10-12
An investment is something thatyou spend money on, which you believewill earn you even more money (a profit) down the line. John Fowler, a wealth manager with McElhenny Sheffield CapitalManagement, says he’s teaching his 6-year-old daughter about investing by having her take money out of her piggy bank each week to put into an "investment account" (also known as “the box in daddy's filing cabinet).
Fowler says the idea is that if she leaves $10 in the box, she’ll make an extra $1. “It took a couple of months of forcing her to put the money in the box in the filing cabinet. I set an alert on my phone to go off every week and I would add one quarter a week for every $10 she would "invest." By keeping the time frame we use to review her gains relatively short, weekly, it kept the concept front of mind and it became fun for her.”
Kids should know, however, that although people invest in things that they hope will make them more money,it doesn't always happen that way. That's why it's never a good idea to put all of your money in a risky investment, because if you do and the investment fails, you could loose it all.
9. Stock – Age 12+
A stock is a piece of a company. When you own a stock of a company,you own a small piece of its business. Every stock has a price and that price can go up or down, depending on what'shappening atthecompany.
Stock movements are bestillustrated to kids with an example of a company they know. For instance, sayyou bought one share of
Learning about stocks can be particularly fun askids get older. There are a lot of online games and appsthey can use to create virtual stock portfolios, which canshow themhow stock prices moveand how much money they would have made or lost if they been dealing with real money.
10. 401(K): 14+
As kids enter the teenage years, it’s a good time to begin preparing them for some of the things they will likely encounter once they enter the workforce, one of which is a 401(k) plan. Francis explains a 401(k) as “a savings account for retirement savings offered by your employer. The money that you put into a 401(k) is taken out directly from your paycheck, and is intended solely for retirement. You can’t withdraw it until age 59½.”
Francis adds, “You don’t pay taxes now on money you put into your 401k…This is a great deal because the money that would have been taken out in taxes is instead allowed to grow and compound your entire working career. Only when you withdraw it in retirement do you pay taxes.”
The money that’s put into a 401(k) gets put into different investments. The ideas is that the investments will increase over time, so the money in the 401(k) will grow as well.
11. Credit Score: Age 15+
Once you plan to give your childuse of a credit card,you mustexplain what a credit score is, Persaud of Transition Planning & Guidance says. Here’s how she describesit: There are three credit bureaus, which calculate your “credit score” or how you use your money. The goal is to have a high credit score – more “likes” by the credit bureaus. The way to receive more likes (a high score) 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 score gets lowered.
It’s important to emphasize that a good credit score will help in the future if you want to borrow money to buy a house or a car. Meanwhile a bad credit score can make it difficult for you to borrow money.
