Teaching Your Children About Money
The 2013 Parents, Kids & Money Survey, conducted by T. Rowe Price, confirms what many people already knew: Children learn money habits from their parents. According to the survey, 97% of the children interviewed turn to one or both parents to get answers to questions about money. At the same time, parents seem willing to address those questions, with the majority saying they have regular conversations about finances with their kids. And yet, among the parents surveyed:
- 57% do not regularly set aside money to save or invest
- 59% do not save regularly for their child's college education
- 60% do not set savings goals
- 29% carry over a credit card balance almost every month
Clearly, when it comes to money management, many parents are not setting the best example for their children.
What follows is not just a quick rundown of financial principles that every parent can and should pass along to his or her child; it also serves as a refresher course for grownups. As you read through this proposed lesson plan for teaching your child about personal finance, ask yourself, how closely are you following these principles in your own daily life?
Basic Money Management
Starting at around age seven, children are generally ready to learn Money 101. Begin by trying to get your child into a regular savings habit. A piggy bank can be a great educational tool, but also consider opening a bank savings account in the child's name. Talk about the need to achieve balance between instant and future gratification. For example, it might feel good to own that cool pair of sneakers now, but what if you decide a year from now that you want a new video game?
Explain how interest adds to savings, which will mean more money available to spend down the road. Speak in basic terms about compounding, the process in which interest attracts more interest, which causes savings to grow over time with increasing speed.
Preteen children can benefit from learning the difference between needs and wants. If your child is pining for a shiny new bike to replace one that's just a few years old and still in good shape, ask if a new coat to replace the one that wasn't warm enough last winter would be a more sensible purchase.
More Advanced Lessons
The teen years are prime years for graduating to a more advanced curriculum on personal finance. In this life stage, your child might be ready for a checking account in his or her own name. Teach the teen how to keep track of checks and balance the checkbook against bank statements. And talk about how bouncing checks could someday impair the child's ability to borrow money, get a job, rent an apartment, and enjoy many other privileges.
Especially if your teen has a part-time or summer job, consider urging him or her to start saving for college. This can also be an appropriate time for your child to learn basic investing. Introduce the main asset classes: cash equivalents (including bank money market accounts, money market funds and CDs), fixed income investments (bonds and bond funds) and equities (stocks and stock funds). Help your teen choose an appropriate asset allocation based on his or her goals, return objectives and tolerance for risk. Highlight the importance of diversification – spreading money around multiple investments to minimize the potential impact of losses on any single investment.
This might be a good time for your child to learn the ropes of budgeting. A budget can help your teen develop and maintain good lifetime habits like conscious spending and saving for future goals.
The wise use of credit is another important topic to discuss with your teen, especially if he or she plans to attend college, where students are targets of heavy advertising by credit card lenders. Advise your child to limit the use of credit cards and minimize interest charges by paying off balances as quickly as possible. Bring up the fact that interest can add significantly to the cost of an item purchased with a credit card. For example, let's say your child puts a $500 tablet on a card charging an annual percentage rate of 18%. If the child makes only a minimum payment of $15 a month, the debt will linger for 47 months and total interest charges will reach $198.34. So that $500 tablet will actually end up costing $698.34.
These are all great lessons to prepare your child for lifetime financial security – and to strengthen your own awareness of what good money management is all about.