There are financial lessons every child must learn. Find out how to start teaching your own children the things they must know.
Growing up, my parents taught me so many things. I learned how to take care of myself. They taught me how to clean and to cook. I learned about ethics, morals and also a lot about my faith. It is impossible to list all of the things they passed along to me. However, I can mention one thing that they never did — Finances.
I once asked my mom why it was never a discussion and she said that her parents had never really taught her that she and her siblings learned by watching. She said that she was not even aware that this was something that should she should have even taught me. In fact, the only thing she ever taught me about money was how to maintain and balance my checking account.
Unfortunately, I made a lot of money mistakes. I even had to declare bankruptcy. However, I am lucky that I learned from my own mistakes and now, will make sure our own children excel in financial literacy. The mistakes I made are ones I never want to see them make.
I thought about what I really should have learned from my parents. My list was much longer than I thought it would be. It helped my husband and I as we are starting to teach our own children about money and what tools they need to learn to use before they leave our home.
This is the biggie. When I moved out on my own I had a list as to the bills I had to pay — which was anything but an actual budget. I can’t tell you how many times my budget included me robbing Peter to pay Paul. It was my normal. The thing is, I don’t want this to my kids’ normal.
A true budget helps you account for every penny coming into your household. It all needs to be assigned a duty. This includes paying the mortgage and keeping the lights on. Your budget should also cover food and clothing. The one thing that you need to make sure you do not forget is to make sure you are also designating money towards savings.
Even at a young age, a child can learn to create and use a budget. It can include simple items such as saving for gifts for siblings. They can learn how to budget for the things they want to do with their friends. And of course, kids need to learn to budget in savings.
It does not need to be in depth, and really should not. In fact, you should start small so that they understand the concept, which will in turn help them to create a better budget as they get older and have more financial responsibilities.
Read More: Teaching Teens About Saving vs. Spending
2. Credit cards
These can be a blessing and a curse all at the same time. Young people need to learn how to handle credit. They also need to establish a baseline for future purchases. But what is most important is that they use credit wisely.
The truth is that many college students head away from home and get tempted by the lure of the credit card. Spend and have fun right now. You don’t need the cash right now. Just pay for it now and pay it off later. Sure, it sounds great, but it is not the right way to handle cards.
Kids should learn that you use a credit card to buy something — but only if you have the money in the bank to cover the cost. The idea is to establish a good credit by buying one item and paying for it in full every month. They need to also understand that while it is tempting to just hold on to your cash, it is the worst way to manage credit.
It can help to use a credit calculator to show your kids how much that $500 credit line (at a rate of 15%) would cost them should they make only the minimum payment. Seeing the cold hard truth can help drive this fact home.
If you want to help your kids learn how to manage credit, you can try this at home. Get an expired card you have and allow them to “make charges” with you for things they may want to buy at the store. Help them understand how to watch their budget. At the same time, help them track the cash they have on hand so that they can pay it off at the end of the month.
3. Debit Cards (and how cloud works)
In this day and age, most people use plastic to pay for everything. This can be very convenient, but can also lead to trouble – tracking your spending.
Kids have to understand that a debit card does not mean that they can use it to buy anything they want. They need to understand the concept. Teaching children to understand how your bank account and debit work together is very important.
You can teach this in the same general way as you would on how to use a credit card. Your child could be given their own debit card. As they use it to get things they need from you, they can hand you the debit card. You can say thank you and then turn around and tell them to now give you the cash to pay for it. This can help them better understand how this is instant payment.
4. Emergency fund
Growing up, I had heard that you needed to have money in the bank for savings, but really was never taught why I should have it. As I got older, I started to realize how much I really need one.
This is one you can actually start at a younger age. You can teach your kids by helping them save a certain percentage of every allowance. It has to be in an account that they know they can not touch. They need to know it is there only for an emergency.
It is not even just the savings aspect, but helping them understand what an emergency is. An emergency is not that the shoes that they have been wanting are now on sale. It could be that the computer they need for school just bit the dust and they need to get a new one.
Read More: How to Quickly Build an Emergency Fund
5. Wants vs. needs
This is another tough lesson. As adults, we understand that we have to always first cover our needs. Then, if there is money left over, we can get the wants in our life. Kids need to understand this as well.
As they move into the real world, payday does not mean that you get to go out with your friends on Friday night. They need to make sure the paycheck first covers their expenses. Then, they can go out with friends.
If you want to try to teach this to your children now, have them make two lists. On one side, have them write down the things they need in order to live. Then, on the other side of the page, have them write down the things they have which are not necessary. You might be surprised at what they come up with. They will identify the difference between wants and needs.
You can then take this tool to the store as you shop and add items to your cart. You child can determine the wants from the needs on the shopping list.
6. Setting financial goals
We all need to have goals in life. That is what drives us. As adults, we have financial goals. They may be getting out of debt. Your goal may be building your retirement fund. It could even include saving for the dream vacation. Your goals are your own and so that makes them right for you.
Kids can learn this as well. For them, it may be a simpler way to achieve the financial goal. Have them determine what big ticket item they want to purchase.
For my oldest daughter, it was a tablet. We sat down and helped her with her budget and then the steps she would need to follow in order to reach her goal. Her plan included additional work to earn more money. She also had to figure out a way spend less of her allowance.
I’m proud to say that it took her some time, but she did reach her goal. The funny thing is that once she had all of that money in her hand, the tablet became less important to her. She has continued to save. The lesson she learned is that she knows how to save. She also learned that what we think we want may not be what we really need.
Read More: How to Set Realistic Financial Goals
If you have a retirement account of any sort, then you currently own stocks. Many people even own stocks on their own through investment accounts. Kids need to understand stocks and a bit about investing.
The easiest way to explain a stock is to tell kids that when you own stocks, you own a small part of a company. As the company is successful, so will they. However, if the company does poorly and loses money, they too will lose money.
Perhaps this is the time for you and your child to make an investment together. Have them sit down with you and do some research and then buy a stock. You can watch the performance together, through the highs and the lows. With some things in life, the only way to learn is to jump in and make it happen.
Read More: Short Term Investments You Should Look Into
8. Money and greed
Teaching kids about greed is actually pretty easy to do (and how I wish some adults would take a repeat and remember this lesson).
The best way to help them understand is by example. Talk about the idea of them keeping all of their toys for themselves and never sharing them with anyone. That is the idea of greed. It is the concept of thinking you need everything and will not share with anyone.
9. Donating (wisely)
Kids need to understand the importance of helping others. Donating does not always mean money. It can mean belongings (such as toys and clothes) or even your time.
The sad thing is that there are many groups who would scam your child and take his or her money without thinking twice. While we do not want to discourage our children from donating money, we need them to understand who they will donate to.
The best way for kids to learn this idea is to talk about illnesses, such as cancer or diabetes. Also talk to them about professions who may ask for help. This might include first responders, schools and churches. Talk to them about the way to donate money to that charity. Discuss that the best way is directly to the group itself. They should understand that it is not wise to give money at our door. It is also better to pass on making donations to the person on the phone.
We certainly do not want to scare our children. However, we need to make sure they understand the right way to make any cash donations to any organizations.
10. Understanding debt
Sadly, this is the one area that many adult have had to figure out on their own. This usually ends with terrible results. I include myself as one of them. Of course, I was able to turn things around and no longer have debt hanging over my head. I never want my kids to feel the stress that debt brings to them.
The way that you can help your kids will depend upon the age, however, here is one idea for older kids. Have your child come up with something that they want to get. Make sure it costs more than what is in the budget or savings. Ask them how they would pay for that item if they did not have the money. This is where it gets interesting.
One suggestion is that you get all of their allowance until it is paid for. The idea of no money at all for 10 weeks sometimes is what it would take for them to understand. Put it all down on paper and even use a calendar. Help them understand how long it would be before they got a dime from mom and dad again.
You may also want to start to talk to them in debt terms. Rather than saying ” you need to pay me back the money you owe”, you could say “you need to repay your debt to me.” It may sound tough, but it might be the right trick to help your own child understand.
Kids really need to get the idea that there is no such thing as good debt. It does not exist.
This is one financial topic I know kids and adults alike do not enjoy. As an adult, we understand that our taxes help pay for a multitude of things. However, this can be a tough one to explain to children.
The idea that even though the store price says $10 that they have to pay $11 at checkout is hard to understand. They really do not get why they have to pay more than what the store shelf shows.
The way that we have explained it to our kids is with complete honesty. We talk about the roads we drive on. Talk about the school bus that picks them up in the morning. Discuss the programs that can help give kids food when Mom and Dad can’t afford it. We’ve explained to them that we always give a little of our money back which in turn, helps others and provides us with things we use every day.
Once kids understand how the roads are paid for, it begins to make more sense to them.
12. Retirement savings
When you are 10, you are thinking only about what you want to do this weekend with your friends. You are certainly not thinking about retirement. However, the reality is that they need to understand this.
As adults, we know that relying upon the government to take care of us when retire is not the wisest retirement plan. Who knows if social security will even be around by the time our kids hit retirement age. We have to take charge of our own retirement and plan accordingly.
You’ve already discussed the importance of saving money. Kids understand that this is to pay for things in the future. We also talk about a budget and paying expenses with our paycheck. The way to explain this to kids is by asking them how would they pay for something if they were not working anymore? Who would pay the electric bill? How would they buy food? Help them understand that even though it is still a long way off, they need to save a now so that they can live later on.
Read More: Seven Types of Retirement Accounts
I know that these are a lot of lessons to teach your kids and you may (or may not) agree with all of them. However, if we think our schools will do it for us, we are wrong.
While I think financial literacy should be a required course for all high school kids, it is not yet here. That means, it is up to us. As a parent, it is my job to educate my children. I want them to live a happy, well-fulfilled life. I mean, isn’t that what we all want?