The recent subprime meltdown and the resulting increase in foreclosures has been an educational experience for the entire country, but one important lesson that isn’t getting talked about much is this: Kids need to be financially literate. Report after report describes people signing mortgage documents they didn’t understand and buying houses they couldn’t afford—two clear indicators of financial incompetence in action. What might these people have done differently had they been given the gift of financial literacy as a child?
While it’s never too late to acquire financial education, it’s best to start early, and preschool is not too soon to start talking with your children about financial concepts. Yet some adults find it as hard to talk to their kids about money as they do about sex—and maybe even more so. Here’s how you can help your children become financially literate:
Set a good example. Children naturally mimic their parents’ behavior, so set a good example by becoming financially literate and using positive money management skills. Your words and actions should be consistent—for example, don’t tell your children not to make impulse purchases they can’t afford on credit cards and then do exactly that.
Talk about money. Whether it’s during meals, while driving in the car, or while engaging in a leisure activity with your kids, talk about financial issues. Keep the conversation at an age appropriate level, but introduce subjects such as the economy, investing, interest rates, debt management, saving, charitable giving, and more. In addition to talking, listen. Encourage your youngsters to share their thoughts and feelings about money without fear of criticism.
Be honest. Kids should know the truth about the family’s financial situation. It’s not necessary to send a message of constant doom and gloom, but don’t paint a picture that’s rosier than reality. If you’re financially secure now but have made mistakes in the past, share that experience with your kids—let them know that you struggled, and that they may have to as well. It doesn’t mean they’re failing, it just means they’re learning some lessons the hard way.
Explain saving and investing. When children are young, you typically teach them to set aside a portion of their money for savings—first in a piggy bank, then in a commercial bank. As they get older, teach them about investing and how they need to learn to put their money work for them, not just earn a pittance of interest in a savings account.
Require your kids to keep financial records. Have your kids keep a diary of the money they receive, whether it’s their allowance, from work, or gifts, and what they do with it. At least once a quarter, sit down with your child, review their financial records, and talk about what they’ve done with their money. This is a good way to introduce the concept of keeping records and balancing your accounts.
Use everyday events to teach the value of money. A trip to the grocery store can be a great learning experience. Take advantage of this mundane chore to teach your kids about value, quality, and how to make unit-price comparisons. When buying other consumer items, involve your children in the evaluation of issues such as quality, performance, reparability, warranties, safety, and other consumer concerns. Let them learn how planned spending reduces waste and increases value, in contrast to unplanned spending which usually results in poorer value and therefore wasted money.
Let your youngsters make spending decisions. Once you’ve taught them the basics, give your kids a chance to practice what they’ve learned. Chances are they’ll do some things right and some things wrong. Let them learn that their decisions have consequences, both good and bad. When they make a mistake, don’t scold or punish, but do let them live with the result—no matter how tempted you are to rescue them. Guide and advise, but don’t direct and dictate.
Teach your children about advertising. Consumers are bombarded with hundreds of advertising messages every day, and children are often the targets of those messages. Show your children how to evaluate an ad and figure out if a product will really do what the commercials say, if the price is reasonable, and if there are alternative products available that might do a better job and/or cost less. Be sure they understand the advertising strategy of appealing to emotions and that they know how to separate the emotional appeal that could drive them to make financially unwise decisions from logic, economy, and utility.
Explain the truth about debt. Teach your children about the difference between good debt and bad debt, about how using debt to build wealth is good but using debt to buy depreciating consumer items is bad. Make sure your kids know that simply pulling out a credit card does not mean that something is paid for, and that they shouldn’t charge consumer goods they can’t afford to pay for at the time of purchase.
Have your children participate in the bill-paying process. Let kids see how often you have to sit down and pay bills—and let them see the bills. Show them how to write a check or use your online bill paying system, and let them actually pay a few bills every month. They should know how quickly the balance in your checking account declines after the mortgage, utilities, and credit card bills are paid each month. Show them how to check bills for accuracy—especially how to review a credit card statement and be sure all the charges are legitimate and accurate.
Teach your children the value of giving. Help your children develop the habit of giving to charity from an early age, whether it’s giving to a church or other charity. You might suggest that they set aside 10 percent of whatever income they receive for this purpose. As you teach the value of financial giving, also stress the importance of giving of themselves.
Have your kids set financial goals. Talk to your kids about what they want in the future such as going to college, a car, or their own home. For younger children, it may be things such as a bicycle, a game, or an electronic toy. Each child should write down their goals and put together a plan to achieve them, then periodically review the plan to see how they’re doing. Encourage them to maintain this habit throughout their lives.
What’s most important to keep in mind is that there is nothing mysterious or difficult about financial literacy. Children who are not taught these valuable lessons pay an expensive price for the rest of their lives. Get your kids on the right track as soon as possible and watch them blossom into financially secure, independent adults.
