In our growing global economy, credit has become king. Credit reports, credit scores, credit cards, and lines of credit all play a significant role in personal, corporate, and international finance. Unfortunately, many of our nation’s young people do not have the financial know-how necessary to survive and thrive in this economy.
A recent report
shows a shocking lack of education and preparedness when it comes to economics and personal finance. Only 25 state legislatures have introduced or passed legislation this year that would increase access to financial education.
Experts worry that the consequences of this lack of economic knowledge may be devastating. Children who do not fully understand how money and credit work; will likely grow into adults with substantial consumer debt, no savings, and poor credit scores. Financial literacy is crucial to future security and success. If you’re ready to teach your children the ins and outs of finance and credit, here are some ideas to get you started:
Awareness and Introduction (Ages 2-5)
Having money conversations with your preschooler may sound absurd, but it lays a good foundation for future understanding of money concepts.
Children in this age group can classify coins by size or color. They can watch a clear jar fill up with coins. They can see the result of putting coins in a machine and getting something in return, such as a sticker or a candy. NOTE:
Be sure your young child only handles coins with an adult present, so they do not put coins in their mouth.
It is also an excellent time for your children to see you paying for items with cash rather than with a card. Although they will not understand how all the differences between spending options at this age, using cash provides young ones an example of exchanging currency for a good or service in a form that they will be able to replicate themselves using allowance or gift money. Unlike using a credit or debit card, they will be able to see that once money is spent, it is gone from your wallet.
Saving, Spending, and Giving (Ages 6-12)
These years are ideal for establishing habits for saving and spending. In this age group, children start to understand the math behind money. They begin to grasp how the values and denominations relate to each other and how the amounts translate into buying power. They’re likely learning money math in school by this point as well.
This age is the perfect time to introduce a system that pays your children for their work. They need to learn that working has value in the income it brings. They also need to have an opportunity to decide how to use that income.
There are many different ways to go about providing money to your children. The most effective methods involve paying your child for legitimate work that they accomplish for the good of the family.
For example, making their bed is probably not a chore that should earn money. It’s just the right thing to do to take care of their own space. However, sweeping the deck is something that benefits the whole family and could warrant a “payday.”
One of the hardest things for parents is to allow their children to spend their money on seemingly frivolous things. It can be tough to watch your child waste the $5 you just gave him on cheap toys at the dollar store.
Part of learning about money is the opportunity to spend and even the chance to regret spending. This regret is valuable. If your child has used all their earnings, and then the ice cream truck comes around, they will probably feel sad that they don’t have the money to get a treat.
This disappointment opens the door for conversations about saving money for future needs and wants. Talk with your child about your family’s household budget and how you choose to spend or save your money. Ultimately, these conversations help children fine-tune their spending and saving habits.
These years are also perfect for establishing the habit of giving. Talk with your child about causes that they would like to support and help them find appropriate ways to give a portion of their earnings.
Responsibility and Credit (Ages 13-18)
By this point in your child’s life, they may be earning consistent money from babysitting, lawn mowing, or dog walking. Once they turn 15 or 16, they could have jobs in real businesses. They will also probably have more things they need money for, such as going to the movies, shopping, paying for gas in their car and going on dates.
This age is a great time to help your child build a simple budget. Work with them to get their income and expenses in writing so they can visualize their spending. This will also help them set goals, such as buying a car or new video game system, and making plans to meet those goals.
Teach your teen the true nature of credit and borrowing. If your child wants to borrow $20 to go to a movie, and you are willing to loan it, write up a simple contract for them to sign. Here’s the key: be sure the agreement includes some amount of interest and a date by which your child must repay the full amount.
If you aren’t comfortable with this, that’s fine. Then your teen doesn’t go to the movie, and they will have learned that they need to have money saved up before they can make any purchases. That is an incredibly valuable lesson, too.
Children need to learn that borrowing money costs even more money. Teens begin receiving credit card offers the moment they turn 18, and so many young people get in over their heads quickly because they don’t understand credit and interest. Make this concept crystal clear to your child early on, so they don’t fall into that trap. Explore safe credit card options like secured cards with your teen as another way to familiarize themselves with the concept of credit and loans.
Take the opportunity now to support and teach your child about money so they are set to succeed and enjoy financial security later in life.