Most of us handle money on a daily basis so it’s important to understand the basics of financial literacy. Financial Literacy Month is the perfect time to start teaching your children about money. We have identified five financial basics that you could start teaching your children this month. Help set up your children’s future now.
What is Financial Literacy Month?
Financial Literacy Month started in 2004, by a nonprofit organization called Jump$tart. Their primary purpose is to promote financial literacy across the U.S., especially in schools for kids and teenagers. Early education allows individuals to develop a healthy relationship with money. Children will then have the knowledge that they need to wisely make decisions about how they will pay for college, a car, or even a mortgage as they get older.
Why is financial literacy important?
Financial literacy empowers people. It’s important because it’s how people learn to save, earn, borrow, invest, and protect their money wisely. According to a FINRA study, two-thirds of Americans are financially illiterate. Poor financial literacy can lead to poor decision-making. This can limit a person’s and/or household’s ability to reach their financial goals.
When do kids start learning financial habits?
The perfect time to teach your children about money is earlier than you may think. A study by David Whitebread and Sue Bingham of the University of Cambridge found that children often develop their financial behaviors as early as age 7. By educating your children early, you can set them up for a better financial future.
5 financial basics to teach your children
1. Budgeting basics.
Having a budget means that you know how much money is coming in and going out each month. This is an essential financial concept for children to learn. You could help your children create a budget by creating a spreadsheet and getting them to enter their allowance and any expenses. Explain that they can’t spend more than their allowance.
When budgeting, it’s important to have a discussion between wants and needs. This is a good place to start because even children as young as 3 can grasp the concept of wants vs needs. Making good financial decisions start with being able to distinguish between what is necessary and what is nice to have.
2. The importance of saving.
It’s important to teach your children to save for something rather than instantly getting whatever they want. Sit with your children and create one savings goal. You could provide an incentive for your child to save, such as matching a percentage of what they put in their piggy bank or their bank account. This also teaches them delayed gratification. For example, if they want to purchase the latest video game, they may have to do many chores before they can afford it.
You could take them to a bank and have them open up a savings account. Depending on their age, you can let them fill out the deposit form and give the money to the teller. Once their money is in the bank then you can sit down and review the monthly statements with them. Show them how to read a monthly statement and to check for accuracy. This will help children understand how their choices affect the outcome.
3. The impact of interest.
This is the idea that money can make you money or cost you money. Teach your children that when you take out a loan, you will be responsible for paying back the principal amount and the interest that you accrue on the loan. The faster you pay back the loan, the less interest you will pay.
When you have a savings account that accrues interest, the interest is added to your principal amount. Interest is then earned on the new, larger principal. This is known as compound interest. This is an important concept for children to understand. If they start saving early in life then it will make a huge difference to their overall wealth later in life.
4. How inflation impacts your money.
Inflation is defined as the decline of your purchasing power over time. It means that your dollar can purchase less today than what it would have a year prior. Inflation has been increasing at rates not seen in the last 40 years. I am sure that you will have many personal stories about inflation that you can use to explain the concept to your children.
Understanding inflation is important so that children understand that the price of things don’t always stay the same. This means that if something increases in price then they need to go back and reevaluate their budget or savings goal. For example, you could buy a candy bar for $2 today. In a year, that same candy bar may now be $2.50. You would still only have $2 but the price of the candy bar has gone up. The price of the bar has been “inflated”.
This also teaches your children about the importance of putting their money into some sort of interest-earning account to try to keep up with inflation.
5. The importance of establishing a credit history and keeping your credit card balance below 30% of your credit limit.
This financial basic is specifically for teenagers. Before your teenager goes to college, help them get a credit card. Accounts co-signed by parents have small credit limits. This will help your teen learn how to safely manage credit and begin building a credit history.
Teach them about credit scores. Your credit score is a 3-digit number that represents your financial track record. It ranges from 300 to 850. It allows financial institutions to determine the risk they undertake in lending you money. If your credit card balance is above 30% of your credit limit then it can cause your credit score to drop.
Essentially this means, try not to spend more than what you make. Try to keep your debts in check. Don’t take out more than you can comfortably handle. Pay off your balance each month and keep your revolving credit high. It’s important to have a good credit score because it can help you when you do need to take out a loan and you may even receive financing at a lower interest rate.
Teach your children about money during financial literacy month.
Financial Literacy Month is a great time to have discussions in your home about saving, spending, budgeting, giving, and other financial-related topics. Reevaluate your current financial knowledge and teach your children the basics so that they grow up with a strong financial foundation. Parents who teach their children about financial literacy are setting them up for a happier and secure future. If you want help with finances for your family and are interested in having a comprehensive financial plan, feel free to schedule a discovery call with one of our financial advisors today!
Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner, in Washington, D.C that works with clients across the country. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital, a financial planning firm designed to help professionals in their 30s and 40s achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help elevate your finances.