April is Financial Literacy Month. While it’s not something we go out and celebrate, it is certainly worth our attention. Officially recognized by the U.S. Senate in 2004, Financial Literacy Month shines a spotlight on the importance of teaching Americans how to establish and maintain healthy financial habits. That may sound a bit lofty, but in reality, it just makes practical sense. And the earlier we start to learn the better off we are.
Which leads me to one of my pet subjects: the important role parents have in teaching their kids about money. With the lack of adequate financial education in many of our schools, it falls on parents to introduce kids not only to practical realities such as managing a checking account and sticking to a budget but also to bigger financial concepts such as saving for a goal and investing for the future. And the good news is, according to a Council for Economic Education video I recently watched, kids do understand how important these things are.
In the video, elementary to high school students shared thoughts on the importance of financial education. Their comments were fascinating, ranging from “I want to be able to protect and take care of my family” to “You need to know the practical basics to live” to “Dreams cost a lot.” All of these comments relate not just to money but also to life. And to me that’s great, because life lessons and money lessons go hand in hand.
These young people seemed pretty financially aware, but I know most parents struggle to get their kids engaged. In the spirit of Financial Literacy Month, here are five common life experiences I think parents can use to get their kids to pay attention to important financial concepts.
1) Getting an allowance — Want your kids to make good money choices? Give them some money of their own to manage. An allowance is a good first step. Be sure to set expectations right from the start. For example, you may want to tie at least part of their allowance to chores, which can give them a taste of responsibility as well as an understanding of what it’s like to work and be rewarded.
Also, what do you expect your kids to pay for with their own money? Help them come up with a budget to handle their expenses, and don’t bail them out if they fall short. The amount and frequency of an allowance will change as your kids get older, but the main thing is to let them manage and make their own mistakes.
2) Saving for a big purchase — Whether your child wants a bike or a laptop, having a genuine savings goal brings home the concepts of trade-offs and delayed gratification. Start by creating a time frame and savings plan for making the purchase. Help your child track spending and identify opportunities to save. An online savings calculator can be a great motivator — as can offering to match a portion of your child’s saving. This would also be a good time to help your child open a savings account and become familiar with the concept of compound interest.
As kids get older and their savings goals get loftier — say, a car or a big trip — there are other financial lessons that go beyond savings. There’s researching and comparison shopping, (possibly) financing and handling associated expenses. That takes not only saving for the purchase but ongoing money management. A monthly budget planner is an excellent tool to help your teen put the numbers together, even if you’re doing it as a joint venture.
3) First job — If you haven’t done so already, now’s the time to help your teen open and manage a checking account and perhaps even get a credit or debit card. To reinforce saving, encourage setting up an automatic deposit from a checking account to a savings account. Plus, as your teen builds up savings, you could suggest opening a brokerage account (custodial if under 18) — or even an individual retirement account, if they have earned income — and introduce some basic investing concepts. An IRA can be a great way to reinforce the importance of saving for retirement, and a first paycheck is a great introduction to taxes.
4) Going to college — If your kids are college-bound, hopefully you’ve involved them in saving toward this major goal. But there’s more to college costs than tuition. Sit down together and talk about living expenses, books, food, transportation, personal care, insurance — all the things they may have taken for granted so far. Be clear on what you’ll pay for and what you expect your college student to cover and then create a budget together.
Also make sure your student has a checking account and knows how to properly use a debit or credit card to handle expenses. If you haven’t had the credit card talk yet, now’s the time to get into the details, from interest to late fees to credit reports. Be sure to stress the pitfalls of misuse, which could really come back to haunt them later in life.
5) Moving out — Hopefully, the lessons learned so far will help your kids with this major transition, but they probably still need your guidance in the financial realities of living on their own: understanding how to balance essential expenses, nice-to haves, car and renters insurance and an emergency fund while staying on top of debt (especially student loans). If your kids haven’t been interested in these things before, they should be now.
We all learn from our own experiences, but your kids can learn from yours as well. Share your personal financial lessons — where you’ve succeeded and where you’ve failed. Then let them have their own successes and failures. Those may be the most effective life lessons of all.•
Carrie Schwab-Pomerantz, Certified Financial Planner, is president of the Charles Schwab Foundation and author of “The Charles Schwab Guide to Finances After Fifty.” You can email Carrie at firstname.lastname@example.org. The opinions expressed in this column are those of the author.
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