Below is a story to help illustrate why money lessons for children is important:
During a lesson on credit one of Stuart Ritter’s college students raised her hand and asked him to clarify what he meant by “carried balance.” He explained that if she were to swipe her credit card for a $10 meal and pay the credit card company $8 that month she’d then receive a bill for the remaining $2, or the carried balance. Her response: What do you mean they send a bill?
“She didn’t understand that you actually pay for the items you swipe on a credit card with real money,” Ritter says. “Her parents always pay the bill and she was never taught how basic money transactions work.”
That’s an extreme case but indicative of a larger problem kids face: Lack of education on money. Not enough parents are talking to their kids about money early enough, says Ritter, a CFP and senior financial planner at T. Rowe Price.
Teaching kids the mechanics of money is important for their future financial health. money lessons for children should start earlier than high school or college where there is sometimes a brief course taught on financial planning.
How early? “Talk to kids about money as early as 5-years-old, or as soon as they realize that money buys things,” Ritter says.
Basic money vocabulary is a good place to start. By age 5, Ritter recommends teaching your child the following terms:
teach your children the definitions of:
Seem like a lot of information for kids to handle? It’s not. Consider that parents talk to their kids about drugs, sex, internet and personal safety but the topic of money is somehow taboo.
Ritter says you don’t have to tell your kids exactly what’s in your bank account or how much you make, but they should understand that money comes out of an ATM machine only because deposits, like earnings from work, are made into the bank account. Also, that a portion is then used toward things like the mortgage, taxes, credit cards, savings, etc.
Money lessons for children are not taught in a single sit-down talk but rather they’re more effective in real-life situations. Ritter gives an example with his own kids who were squeezed into the backseat of the family car recently. When he asked if they’d like for him to buy a larger car where they could all sit comfortably the answer was a unanimous and enthusiastic, “Yes!” Ritter agreed but mentioned that the money for the new car would come from the family’s vacation savings, and that plans to go on a beach vacation would be put on hold. Suddenly, the crowd became less enthused about the car.
Those kinds of real-life examples illustrate the mechanics of money, values and priorities. “It’s not about saving for the sake of saving. It’s about spending choices and figuring out if you should spend now or spend later. It’s about teaching priorities and trade-offs,” Ritter says.
Those kinds of lessons can pay off later when it’s time to make decisions big decisions like paying for college, for example. With delinquency rates on the rise, student loan debt has become one of the biggest financial concerns in the country. Early money lessons could help your kid make smart financial decisions and avoid burdensome debt they may have otherwise taken on.
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