Chances are there was a lot you didn’t know about finances when you reached adulthood. You may have overextended yourself when buying a car, been mystified by the APR on your home mortgage, or you may be one of those unfortunate people who ran into a financial predator who sells high-commission investments, annuities, or unnecessary life insurance coverage.
You don’t want your children to learn these lessons the hard way. What can you do to help them master the complexities of this mysterious thing we call “money?” First, you can, as one of my previous blog posts explored, teach them about the relationship between risk and reward (return). Second, you have to be creative.
The bad news is that you’ll have to home school this curriculum, since primary and secondary schools inexplicably don’t teach basic money skills, and the only way your children will be taught about money in college is if they decide to take financial planning courses that are taught at a fraction of all the colleges and universities in the U.S.
Just like any other subject, a money curriculum provides information and teaching that is appropriate to the age. You are not going to be able to teach a seven year old about graduated income tax rates or the wonders of compound interest, and she will have no idea what you mean if you tell her that your home cost $200,000. So consider this as an age-appropriate guideline for developing money mastery in your children.
Some experts say that your child’s financial education should begin as soon as he or she is old enough not to eat the money. But money is fundamentally about mathematics; when your children can add and subtract, they can start the money learning process.
Step one: Introduce your children to coins first. Explain the value of coins in terms they can understand – how many are required to buy gum, a candy bar, or something else they ask you for as you shepherd them past that dreaded candy display at the checkout counter. Help them learn to make change and convert one kind of coin into others. Later, you can do the same for bills.
Step two: Begin giving your children an allowance, and as time goes on, draw an ever-clearer link between chores and allowance. When children make their beds, put their clothes in the laundry and take their dishes off the table, they recognize that their weekly stipend is earned rather than doled out. (This is an area where experts disagree, because of the possibility that a child will decide not to make her bed and then challenge you to dock some hard to calculate percent of her allowance. But a compromise is to require that the chores be done.) Pay extra for additional jobs your children perform.
Step three: Encourage your children to save some or all of their allowance in a piggy bank. They’ll begin to see how the coins accumulate, and how that process can eventually deliver enough of them to buy something they might desire. This is the fundamental essence of saving. Interestingly, research has shown that some children are distrustful of a piggy bank if they can’t see where the money went. The state of the art in piggy banks is the Money Savvy Pig, a see-through piggy bank with four slots: save, spend, donate, and invest. The goal is to help kids learn that money isn’t just accumulated to buy things.
Step four: Empower your children to manage their own money. Let them decide how their allowance will be used, and let them make mistakes. If they make impulse purchases, and later want something that costs more than they currently have, that becomes a teachable moment. My wife and I have done this more than once – and that stuffed animal that they had to have all of a sudden seems not important when they do not have enough money to buy the souvenir that they wanted at the beach.
Step five: Incorporate your money mastery teaching into your everyday activities. In the early years, use your trips to the grocery store to explain prices. When you go to the ATM, you can explain that money doesn’t actually come from a machine. Later, when you open bills, you can talk about payment for services like the phone and cable TV.
As your children reach middle school age, you should start to increase their responsibilities – to help them learn by doing.
Step One: Start to make your children responsible for paying, out of their allowance, more of their daily expenses school clothes, school lunches, birthday presents – and help them create a budget that allows them to save if they buy wisely. How much money should you give them? Keep track of what you have been spending on their needs and desires over several weeks, and arrive at a reasonable figure that exceeds their weekly or monthly costs by the amount of allowance you intend them to have.
Step two: Have your children set up a savings account, and tell them you will match every dollar they put in there. The only stipulation is that they cannot take out the money you put in. That is earmarked for long term savings and/or college expenses.
Step three: As you shop for groceries or head to the mall, help your children comparison shop, so they can eventually go out on their own and shop for value. Show them similar items that might have very different price tags. You might also consider using cash for your purchases when you go out with your children. They are not going to learn very much about money if they see you paying for everything with that magic piece of plastic.
Your high school age (pre-college age) children will soon need to function on their own financially, so consider these finishing touches.
Step one: Help your children set up a checking account, so they can get familiar with staying on top of their account balance and pay their expenses by check.
Step two: Explain how debt works, and show your children a credit card statement (if you have one) that includes finance charges. A surprising percentage of teenagers did not understand that banks charge interest on the loans they make. Many teens don’t even realize that credit cards are a form of borrowing. Consider giving them additional money each week or month for gas purchases, and get them a gas station credit card that they can pay off each month.
Step three: Let your children invest. Your child may not yet have the money to buy a Treasury bill or 100 shares of Apple, but you can buy mutual fund shares at very low initial payments, and many fund companies have programs especially set up for teens. Look together at the fund’s most recent holdings report and see how many companies you recognize – and help your children monitor the performance of the investment. Show them on a simple spreadsheet how a regular, monthly investment compounds over 10, 20 and 30 years. Chances are you, yourself, will be astonished at the accumulation opportunities of the very young.
Step four: Your children have entered the summer job years, which gives them an opportunity to learn about taxes. Children who have never held a job before and thought that taxes did not need to be paid until April 15 (or not at all) will learn a quick lesson from their first paycheck statement. Most employers will be withholding far more tax than your children will end up owing, and the FICA withholdings provide another teachable moment. (You can, of course, file a W-4 claiming exemption from withholding, but appropriate payroll taxes will still be withheld.)
There is more, of course, such as sitting down with your children and discussing charitable donations (some parents save all their charity solicitations for six months and then sit down to go over which look most appealing) and the need to save receipts if your children go into business for themselves (such as mowing lawns or housesitting animals). Consider those optional elective courses in the overall curriculum.
If your children manage to graduate from this money mastery home school program, they will be far better prepared for the real world of money than you probably were. And they will be far more likely to succeed financially than 95 percent of their peers, who will enter college with only a dim idea of what a checkbook or budget is.