5 money lessons for kids of all ages
By Dawn Papandrea
February 23, 2015
There are so many important life lessons to teach your children that something as seemingly far off as the perils of debt often falls by the wayside. After all, they won't have credit cards until they are adults.
However, experts say instilling a strong foundation of good money habits early on will lead to plastic prudence later.
“You can start teaching children about money as young as ages 4 and 5,” says April Clobes, executive vice president and COO for Michigan State University Federal Credit Union.
Not sure where to start? Here's an age-by-age guide for turning your tots into responsible credit users as they grow.
Lesson Plan: Money basics, needs vs. wants
Start simple with the value of coins and dollars, and what you can buy with them, Clobes says.
You eventually want to move into a discussion on needs versus wants, so they can grasp the concept of delayed gratification, says Kevin Gallegos, vice president of Phoenix operations for Freedom Financial Network. “For preschoolers, putting this into practice means teaching them that they can't have every toy they want all the time,” he says. That lesson will hopefully stick with them when they're contemplating a splurge with a credit card in 15 years or so.
Try this: Play a guessing game, suggests Denise Winston, founder of Money Start Here, a financial education company. Ask your child: How much do you think that costs? How would you pay for that? How long would it take you to save for that? What else could that money pay for? “You don't have to go into every detail at this age. The idea is to use those teachable moments and get kids thinking,” says Winston.
Lesson plan: Making money decisions
Your children might already be earning an allowance for doing age-appropriate household chores, says Gallegos, but don't stop there. Parents can help children allocate their money, such as spending a little on something they want, setting some aside for savings and giving some toward a charitable contribution they care about, such as a pet shelter or local children's hospital, he says. This way, they're not simply blowing their whole allowance each week at the toy store. Instead, they are learning that their available spending money only goes so far.
Try this: Use jars or envelopes and pay kids in small bills so they can divide up their money. “Money is conceptual and not very physical, so the more touchy feely and physical we can make it, the better,” says Winston.
Lesson plan: Saving and borrowing
As math knowledge increases, you can start explaining how interest works. Open a savings account for the child, and show her how her saved money grows, says Gallegos. Online tools such as a compounding calculator can help.
“Sharing the decision-making process involved in allocating income to choose whether to buy a plasma television or pay the orthodontist can give kids the valuable lesson that 'money doesn't grow on trees.'”
–Kevin Gallegos, Freedom Financial Network
“Or, if kids want to borrow money to buy an item, offer to lend it to them with interest and explain the effects,” he says. Clobes agrees. You can kick in some money to help your child make a purchase when her funds are short, but use it as a teaching opportunity. “If they want to buy something that is $50 and they have $20, ask them what they will do to pay the $30 back to you,” she says. That way, you're demonstrating to them that a loan is a privilege that comes with a price.
Try this: Take her on financial field trips. It might be a pain, but taking the child with you to make deposits into her bank account can be effective, says Winston. Explain how the transactions work and go over bank statements with her regularly.
Lesson plan: Budgeting
As your children get older, their tastes and activities get more expensive. Instead of just quietly paying for everything, talk with teens about how such expenses impact the family's budget, says Gallegos. “Sharing the decision-making process involved in allocating income to choose whether to buy a plasma television or pay the orthodontist can give kids the valuable lesson that 'money doesn't grow on trees,'” he says. That goes for purchases that parents decide to make on credit, too. Be clear about the cost of debt, especially if it's not paid.
Try this: Bill your teens. Winston did that when her daughter got her first cell phone. “I wanted her to understand what her portion of the cell phone bill was and that it's not a requirement; it's a luxury,” she says. She was responsible for paying her share, but she also knew there would be consequences for late payments. “If she was late, she'd get a $20 penalty and if she was really late, we'd take the phone away. Just like what would happen in real life,” she says.
Ages 17 and up
Lesson plan: Intro to Credit 101
Luckily, older teens can't get into as much debt trouble as they once could, says Gallegos. “Thanks to the passage of the [Credit] CARD Act, credit card lenders can no longer solicit students to open cards. And card companies also are no longer permitted to issue cards to applicants under age 21 without an adult co-signer or proof of adequate income,” he explains. That means parents have ample time to give their teens a credit crash course.
Try this: Show them the money (actually, the statements). Choose an account that you feel comfortable sharing with your teen and walk him through all the important elements, suggests Winston. Then, give a pop quiz: “What is the finance charge? Are there charges on there that shouldn't be on there? What's the due date for the payment? If I'm late, how much is that late fee?”
Along those lines, when you pull your credit report (you can do that annually for free via AnnualCreditReport.com), it's not a bad idea to show teens that every activity is monitored. You can find sample ones online, too, if you'd rather keep the discussion generic. Here's the key: If you compare credit reports to the report cards they get in school and equate the credit score to a financial GPA, they will get it, says Winston. In keeping with that premise, explain that if you turn in all of your assignments — aka, pay all of your bills on time — you'll make honor roll. In school, it might mean a scholarship; in the credit world, it means access to better interest rates on auto and home loans, or the ability to get a great job or apartment.
Ultimately, no matter what age your child is, she will be influenced by the financial habits she observes, and the lessons that you impart. By taking the time to develop your kids' dollars-and-cents sense, you'll set them up for a lifetime of financial rewards.