Have you thought about a good financial education for your children? Financial illiteracy appears to be rampant in the younger generation. The same kid who is adept at using a smartphone or iPad may have trouble with basic math skills, balancing a checkbook, or managing money.
Knowing about money – how to earn it, use it, invest it, and share it – is a critical life skill. Unfortunately, such skills are often given short shrift in our education system and homes. Recent surveys have highlighted an astonishing level of ignorance in today’s teenagers when questions about simple financial concepts are raised. For example, one survey found that only 26% of teens understood credit card interest, and only one in three could read a bank statement or balance a checkbook.
If you haven’t already started teaching your children about money and finances, you’re neglecting an important part of their education. But where do you start? Perhaps begin with the following benchmarks of financial literacy.
- Time value of money.
One of the most essential of all financial concepts is the time value of money. Children should be shown the benefits of saving money, watching it grow, and patiently deferring purchases until a future time. When children grow a little older, they can learn the reverse lesson: how debt today results in accumulated interest costs down the road. To illustrate the point, show them a loan amortization schedule for a typical car or home loan. That should get their attention.
- Transactional skills.
In today’s cashless society, your children will someday need to know how to write a check, how to use a debit or credit card, and how to bank online. When they are ready, consider taking them to the bank, introduce them to a representative, and set up their first checking account and bank card. Children will appreciate this rite of passage to adulthood, and they will learn how to use an ATM or bank website correctly.
- Good records.
You might feel a little hypocritical when pointing out your children’s recordkeeping shortcomings, but they probably need your help more than you think. Knowing how to reconcile a checkbook and track where they spend their money is a valuable life skill. Developing a system for safely storing receipts, warranties, and other valuable papers is also important. When your child begins driving, point out the location and importance of the vehicle proof of insurance and registration.
- Investment concepts.
Introduce your child to investment basics by having him or her acquire shares of one or more stocks or mutual funds. Your child can learn a lot by charting the investment’s progress on a regular basis.
- Borrowing money.
Even if you act as the lender, your child can learn valuable lessons by borrowing a small amount of money. Again, an online calculator will indicate how compounded interest piles up. Your child will likely be encouraged to avoid debt.
It’s not what you earn, but what you keep that matters. Show how taxes can erode earnings and why they must be factored into financial decisions.
- Set a good example.
The way you handle your money may be the most powerful lesson of all for your children. For your child’s sake, as well as your own financial well-being, it’s important to practice what you preach.