Younger generations face an uphill financial battle and federal agencies have begun to take notice. Recently, the U.S. Consumer Financial Protection Bureau outlined recommendations for financial education for grades K-12.
From introducing key financial concepts as early as kindergarten to requirements for a stand-alone finance course as a pre-requisite for high school graduation, the CFPB’s recommendations would help expose more children to finance topics. However, few states currently require a stand-alone finance course and young people continue to lack the skills necessary to make sound financial decisions.
Parents cannot rely solely on schools to teach children the money management skills they need. The sooner parents introduce financial concepts to their children, the better chance they will have to build a solid financial foundation for themselves.
Teaching your children about money can be difficult because many parents lack confidence in managing their own personal finances. However, you do not need to teach children how to perform complex financial statement analysis on stock investments. Instead, the focus should be on beginning to instill financial values at a young age that can be built upon over time.
Needs versus wants
As early as elementary school, consider beginning the financial conversation with children by teaching the difference between needs and wants. It is critical for children to be able to prioritize financially. Consider using a trip to the supermarket or mall as a way to highlight this concept. As you shop, take the time to discuss whether each item is truly a necessity. Also consider using cash rather than credit so that your child can see the exchange of money for goods and services. This helps convey the actual value of money.
As your child begins to distinguish between needs and wants, next re-enforce the idea that money is not solely for spending. Consider introducing the concepts of saving, spending and giving by purchasing and labeling three different piggy banks accordingly.
As your child receives money, have him or her deposit a portion into each piggybank and establish goals for each. Not only will children learn the concept of saving, they will also learn the importance of giving and helping others. Allowing your child to play an active role in this process is important.
As piggybanks fill and children get older and more responsible, it is time to take the money lessons to the next level by introducing an allowance based on household chores. This can introduce the concept that money must be earned. It also can help encourage entrepreneurial behavior in children as they identify additional means for earning money. This is also a great time for children to graduate to a savings account and develop a basic budget. As children get older they can appreciate the sense of accomplishment from budgeting and watching their savings accounts grow as they work toward predefined goals.
For parents whose children will be working summer jobs, that first paycheck is an excellent time to discuss the role of the IRS and the concept of taxes. It helps them to remember that it is not what you make but what you keep that really matters. It doesn’t take long for young workers to become frustrated seeing the reduction in pay due to taxes.
Living, planning and budgeting based upon a net paycheck rather than a gross paycheck is a concept many adults have trouble with, so helping your children to get a head start on this can be beneficial.
Next, consider helping children to develop good consumer skills. Because many young people are technologically savvy, use the internet to introduce the concept of comparison shopping and getting the best deals available. Children will appreciate the additional money that can be spent on other goods and services by paying less for purchases.
Time and interest
Once children have developed the above-mentioned skills, it is time to introduce the most powerful money concept on the planet: compound interest. The idea that investing money early and often can yield substantial results may help children to leverage time — their greatest asset.
Since finance is something that affects all of us both personally and professionally, building a strong financial foundation is critical for children. Working with your children to introduce these key financial concepts can help put them on the road to financial success.
For helpful games and money lessons for children, visit the website for Disney’s Great Piggybank Adventure. There are additional online tools that can help. Because everyone’s situation is unique, consider speaking to your financial adviser for additional information.
Kurt J. Rossi, MBA, is a Certified Financial Planner Practitioner & Wealth Adviser. He can be reached at (732) 280-7550 and kurt.rossi@Independentwm.com. LPL Financial Member FINRA/SIPC.