David Chen is the founder of Millennial Personal Finance
Ironically, as reliance on student loans to finance higher education continues to rise, students are not learning financial literacy as part of their primary or secondary school education. If you live in one of over thirty states where financial literacy classes are not part of the curriculum, it’s up to parents to ensure that their high school-aged children are graduating to adulthood with a basic understanding of paying bills, balancing a checking account, and managing debt. The ability to build good credit is increasingly integral to a modern day life, and many adults in their 20s end up mired in debt that they can’t afford. Eventually, their credit scores show the damage, which results in higher interest rates and a debt cycle that is tough to get out of. This situation could have been easily prevented by a few hours of money management education. If you aren’t sure how to approach money discussions with your children, here are some topics and approaches that will help you get started, whether your children are in elementary school or high school.
Explain What Money Is
Although this discussion isn’t necessary for older kids, if you’re starting financial literacy with young children it helps to explain exactly what money is and what it does. You might start with an explanation of bartering, and why societies evolved from a tit-for-tat trade economy into a cash economy, and eventually, credit. This can be a fun introduction, as you have them imagine what life would be like if we still used a barter system. Have them think of something they want but haven’t gotten yet, such as a new toy, and what they have already that they would be willing to trade for it. You might have them imagine how hard it would be if parents had to take items with them to the grocery store in order to trade for groceries, instead of using cash or a card to pay for items.
A great way to introduce kids of all ages to financial literacy is to help them create a budget. This works especially well if your kids get an allowance or are paid for chores, but even if they aren’t, you can create a micro-economy for your household by substituting something else for real money, such as tokens or beads. Younger ones may have a harder time with the concept of saving, but older children in middle and high school can benefit from creating and maintaining real budgets with concrete goals. Younger kids can use coins or money substitutes to learn about earning and spending. Don’t forget to establish how much money substitutes are worth when it’s time to “spend” from the budget. For instance, five beads might be worth one lollipop. When working with older children, help them to articulate short-term and long-term budget goals, such as “I want to save $20 by next month to go to the movies” or “My goal is to save $500 by summer to go on a trip.” It’s easier and more satisfying to watch saved money grow when there’s a definite purpose to saving.
Pay Your Children
Many parents don’t provide an allowance or pay their children for doing chores, instead preferring to encourage housework participation as a family expectation. And while there’s nothing wrong with this (and every child should be expected to help out around the house as a member of the family) there are a lot of side benefits to establishing a payment system for chores. It impresses upon them that good things in life come from hard work, teaches them responsibility at a young age, and will introduce them early on to the idea of earning specific money for specific work. Consider making some chores a family expectation and others an optional amount of work that can be done for specific pay. You might go about this by setting a weekly amount of chores for a specific allowance, or by creating a “chore list” or “chore board” that children can check that tells them which tasks are available and how much they can earn for completing them. Most parents find that this works equally well with younger children as with older ones.
Discuss Money Openly
It wasn’t that long ago that discussing family finances at the dinner table, or anywhere within children’s hearing, was considered crude. These days, we know that children benefit from hearing their parents have frank discussions about money management, and even from participating in these discussions themselves. Excellent opportunities to discuss money openly, and engage your children in the discussion, include planning vacations, choosing service providers such as for cell phone and cable, and planning grocery trips. Even when the financial discussions are more serious, children benefit from seeing and hearing how their parents compromise and make decisions on difficult money matters.
Don’t Forget About Debt
Teachingyour children about debt is increasingly important as they get closer to adulthood and will be faced with credit card offers, car payments, and student loans. But, the debt conversation can begin as young as you are comfortable with, by explaining how and why debt exists. Cover both the pros and cons of borrowing money. For instance, borrowing money allows parents to purchase a house without waiting and saving for thirty years, but in exchange more money has to be paid over time. As much as possible, pepper your conversations with real examples from your life and the lives of your children.