Parents frequently hear that it's important to teach children about money, and it's hard to imagine any mother or father arguing the point. But obviously you're rushing things if you're trying to explain revolving credit to a 5-year-old. So if you're wondering what concepts kids can grasp and by what age, here are guidelines to get you from kindergarten to college.
Your child is in kindergarten. As you've observed, your child knows plenty about money. Every time you go through the grocery store checkout aisle, he probably demonstrates that he understands there are cool things to buy -- if only he can convince you. But what specifically should young children know about money? According to the Money As You Grow website (moneyasyougrow.org), launched by the President's Advisory Council on Financial Capability, a kindergartner should grasp four key concepts:
1. You need money to buy things.
2. You earn money by working.
3. You may have to wait before you can buy something you want.
4. There's a difference between things you want and things you need.
How to teach your kindergartner: Even some grownups have trouble with that last part. But the best time to begin teaching kids about money is when they are young, before they become preoccupied with digital devices and other distractions. "Five-year-olds are inquisitive, they want to learn," says Diana Webb, an assistant professor of finance at Northwood University in Midland, Michigan.
So how can parents begin to lay a solid financial foundation in young kids? Along with finding teachable moments in your everyday routine, buy your child a piggy bank, suggests Brenda Nayonis, a senior vice president at Rockford Bank & Trust in Rockford, Illinois. "This helps them become more financially aware," she says. If you're so inclined, she adds, you can even bring the money they save to your bank, which probably has a savings program designed for children.
Feeling really ambitious? You can also set savings goals for your kindergartner, says Rakesh Gupta, a business professor at Adelphi University in Garden City, New York, who teaches a personal finance seminar for college freshmen. Then, when your kid meets his goals, you could deposit "interest" in the piggy bank, and explain what interest is, he says.
Your child is in sixth grade. By now, according to Money As You Grow, children should understand the concept of saving, including what compound interest is. Conversely, they should understand that credit cards are loans, not free money, and that if bills aren't paid in full within a month, you'll wrack up interest, paying more than you originally spent. They should also recognize that putting personal information, such as bank account or credit card details, on a website can be risky because someone could steal it.
How to teach your sixth grader: If your child doesn't already have an allowance, it's time, Gupta says. He even thinks opening a bank account for your kid is a good idea by this age --provided you help him use it and teach him to keep track of incoming and outgoing money.
And while it may seem premature to give your children a bank account and an allowance, Webb says, "kids will have a far better understanding of money if they realize nothing is given to them without effort."
Your child is a freshman in high school. Not only should your teen be thinking about college and how much it could cost, according to Money As You Grow, she should also understand that if she won't have the cash to pay for something within the next month, she shouldn't pay for it with plastic.
Ted Gonder, co-founder and CEO of Moneythink, a Chicago-based nonprofit specializing in educating inner-city high school students on financial literacy, says freshmen should also recognize how money can either help -- or stand in the way of -- achieving their dreams.
"They should have goals in mind for their lives and understand that money is inextricably linked to those goals' fulfillment," Gonder says.
How to teach your freshman: This can be hard. After all, you're the parent of a teenager. You don't know anything.
"Try to get in touch with your kid's perspective -- his or her needs and desires," Gonder suggests. "Rather than sitting them down and saying, 'You're 14 now, let's talk about retirement,' or telling them, 'That pair of shoes you bought is a complete waste of money,' instead help them understand how tools like saving and spending mindfully can help them get what they want."
In other words, you may not like what your teen spends her money on, but as long as what she buys isn't an affront to your values, you'd be better off using that new pair of sneakers or video game as a teaching tool. If your teen buys what she wants but in the process learns how to manage her money, you both win.
Your child is a senior in high school. If teens have a job, Gupta says, "they should be given responsibility for paying some of their bills, such as a phone and credit card."
Ideally, by this age, your teen's knowledge of money management should have significantly matured, so that he knows almost as much as you do about several financial concepts. Your teen, according to Gonder, should be prepared to enter his 20s with a sold understanding of:
-- The difference between a grant and a loan
-- The implications of fees and interest rates
-- The dangers of alternative financial services like check cashers and payday lenders
-- How to get and keep a job
After all, this is the time when teens may start making financial decisions that could "determine the financial trajectory of their 20s and beyond," Gonder adds.
How to teach your senior: Try an exercise Webb administers to college freshmen taking her personal finance class. It could work well for any high school senior who spends freely, she says. Webb asks her students to keep track of every single cent they spend for the duration of the eight-week class. She instructs them to avoid vending machines and ask for a receipt every time they make a purchase. After eight weeks, they assess how they're doing and look for spending patterns.
"I then ask them to define want from need. This simple project gets them in touch with how they are spending money," Webb says. "Young adults get it."
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