Financial Literacy for the Next Generation

As parents, we do our best to teach our kids about the world and how to navigate their way to a happy, successful and fulfilling life.  We teach them to tie their shoes, we teach them how to behave in public, we try to impart to them good study habits, and, if we are brave, we even teach them a bit about the birds and the bees.  However, for some reason, one important part of the world we often neglect to discuss with our offspring, is the world of money and finance.  For some reason, money seems to be a taboo subject in many households (yes, even more so than the birds and the bees). 

Financial literacy is a critical skill that parents can, and should, instill in their children to ensure their future success and independence. With the complexities of modern financial systems, understanding the basics from a young age can lead to better decision making and a more secure financial future. Here are five important financial lessons parents can teach their children to set them on the right path and give them their best chances for long-term financial success.

The Value of Money –

One fundamental lesson to impart, is understanding the value of money and the work that goes into earning it. Children need to grasp the fact that money is not an endless resource but something earned through effort, time and hard work. Parents can illustrate this by giving children age-appropriate chores in exchange for an allowance. For instance, a young child might earn money by tidying their room or helping with the dishes, while an older child could earn more by mowing the lawn or babysitting.

For older children, encouraging part-time jobs or entrepreneurial endeavors can further reinforce the connection between labor and earnings. Take the example of a teenager who starts a small business selling handmade crafts or baked goods. By managing this business, they learn about costs, pricing, profits and losses, and the hard work that goes into earning a living. This hands-on experience provides a practical understanding of how work translates into money, and the effort required to sustain a business. Understanding this link fosters a strong work ethic and a respect for what it takes to earn money, which are essential ingredients for long-term financial success.

Budgeting and Saving –

Budgeting and saving are critical skills for financial stability. These are lessons that cannot be learned soon enough. Teaching children how to create a budget helps them understand how to manage both their income and their expenses. This can start with simple activities, such as saving a portion of their allowance for a desired toy or game. Parents can use jars labeled “Save,” “Spend,” and “Give” to help young children allocate their money. This visual and hands-on approach makes the concept of budgeting tangible and accessible.

As children grow, parents can introduce more complex budgeting tools like spreadsheets or budgeting apps. Involving teenagers in household budgeting discussions can provide a practical perspective on managing finances, balancing needs and wants, and planning for future expenses. For instance, parents can explain how they budget for monthly bills, groceries, and savings for vacations or emergencies. By seeing these real-life examples, children learn the importance of planning and prioritizing their spending.

Encouraging children to set specific savings goals can also be an effective strategy. For example, if a child wants to buy a bicycle, parents can help them create a savings plan. This might involve setting aside a portion of their allowance each week and calculating how long it will take to reach their goal. This teaches patience, discipline, and the reward of achieving a financial goal through consistent effort.

The Power of Compound Interest –

The concept of compound interest is a powerful lesson in the importance of saving early. Parents can use visual aids, such as charts or online calculators, to demonstrate how savings can grow exponentially over time. For example, parents can show how saving just $10 a month from a young age can accumulate into a significant sum by the time the child is an adult, thanks to the power of compound interest.

A practical exercise could involve setting up a small investment account for the child and regularly contributing to it. Parents can review the account statements with their child, showing how the interest earned is added to the principal, thus earning more interest in the next period. This hands-on experience makes the abstract concept of compound interest more concrete and relatable.

Discussing real-world examples can also make an impact. Parents can share stories of people who started saving early and now enjoy financial security, such as a family friend who retired comfortably due to disciplined saving and investing. Conversely, sharing stories of individuals who failed to save and faced financial difficulties can underscore the importance of starting early and taking advantage of compound interest.

This lesson emphasizes the benefits of long-term savings and investing, encouraging children to start saving early for significant financial goals like education or retirement. Understanding compound interest can inspire disciplined saving habits that last a lifetime.

Credit and Debt Management –

Understanding credit and debt is essential to avoiding financial pitfalls. Parents should explain what credit is, how it works, and the consequences of mismanaging it. This includes discussing credit cards, loans, and interest rates. Providing examples of both good and bad credit scenarios can help illustrate the impact of credit scores on financial opportunities, such as buying a house or securing a car loan.

For example, parents can explain how using a credit card responsibly, by paying off the full balance each month, can build a good credit score. Conversely, they can illustrate the dangers of carrying a high balance and only making minimum payments, which leads to accruing high-interest debt. Real-life examples, such as showing how buying a pair of shoes on credit for $100, if not managed correctly, can ultimately make your all-in costs for those shoes balloon to over $200—the added cost of interest and fees–can make these lessons more relatable and impactful.

Financial Goal Setting –

Setting financial goals is a powerful tool for motivating financial planning. Teaching children to set short-term, medium-term, and long-term financial goals can give them a sense of direction and purpose. This can start with small, achievable goals, like saving for a new toy, and progress to more significant goals, such as funding their education or buying a car.

Parents can guide children through the process of setting realistic goals, creating a savings plan, and tracking their progress. For instance, if a teenager wants to buy a car, parents can help them calculate the total cost, including taxes, insurance, maintenance costs, etc., and determine how much they need to save each month to reach their goal. They can also discuss the possibility of taking on a part-time job to reach their goal faster.

Using goal-setting tools, such as planning apps, can make the process more engaging and interactive. These tools help children visualize their goals and stay motivated. Celebrating milestones along the way, like reaching 50% of their savings target, can also reinforce positive behavior and commitment. This practice not only helps children learn to save and invest wisely but also instills a sense of accomplishment and financial responsibility. Parents can share their financial goals and progress as well, demonstrating that goal setting is a lifelong skill that evolves with changing circumstances and aspirations.

Summary –

Financial literacy is a lifelong journey, and the earlier children start learning it, the better prepared they will be to make informed decisions as they age, and the more likely they will be to achieve financial stability as adults. Ultimately, imparting these lessons is an invaluable investment in your children’s future well-being and success.  Parents should strive to make these lessons engaging and relatable by using real-life examples, hands-on activities, and age-appropriate tools and resources. By fostering open communication and leading by example, parents can create a solid foundation for their children’s financial education, and empower them to make wise choices throughout their lives.

Disclosures

The commentary on this website reflects the personal opinions, viewpoints and analyses of the Topel & DiStasi Wealth Management, LLC employees providing such comments, and should not be regarded as a description of advisory services provided by Topel & DiStasi Wealth Management, LLC or performance returns of any Topel & DiStasi Wealth Management, LLC Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Topel & DiStasi Wealth Management, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.