What Kids Should Know About Money
A new resource could make it easier to teach your child a lifetime of age-appropriate financial lessons. Here's what they need to know at every age.
Financial writer Beth Kobliner thought of a great holiday gift to give a friend's middle-school child: 10 crisp $10 bills. Except the child was baffled.
"He said, 'What am I supposed to do with this? I can't buy anything on iTunes with it,'" said Kobliner, the author of the best-selling "Get a Financial Life: Personal Finance in Your Twenties and Thirties."
Kids today "don't deal in cash much at all. They don't see the value."
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Kobliner's anecdote indicates two things:
This kid clearly needs a lesson in gift-receiving etiquette.
The tools we use to teach kids about money need to reflect the 21st century.
We no longer live in a world where cash is king, lenders won't let you borrow more than you can afford and a high school diploma is enough to get a good job. In today's world, plastic pays far more often than cash, credit scores matter, and it's easy to overdose on debt.
Saving for a rainy day isn't enough; people have to save for retirements that can stretch decades and figure out how to invest their savings without taking too much or too little risk. College educations have gone from a luxury for the elite to a virtual prerequisite for a middle-class life, even as the costs of post-secondary education have spiraled.
No wonder so many parents feel daunted about the task of teaching their kids what they need to know about money. They may not have a firm grasp on all the concepts necessary for financial literacy, let alone know what's important to tell their kids.
Fortunately, there's a new resource available: Money as You Grow, a series of 20 age-appropriate financial lessons developed by the President's Advisory Council on Financial Capability. http://www.moneyasyougrow.org/#
This is Kobliner's baby, a project that took more than a year to develop, using what she calls "the best available research, standards and guidelines." The website that presents these ideas includes activities to help parents teach each concept. For example, Milestone No. 5, "You need to make choices about how to spend your money," can be taught by discussing some of your small decisions with your 6- to 10-year-old child, such as why you pick one item over another at the grocery store.
Kobliner, a mother of three kids, ages 16, 13 and 8, wanted to create a resource that was simple and user-friendly enough to start the conversations parents need to have with their kids. The concepts can also be used by Scout groups, community organizations and businesses interested in teaching literacy. And there's a colorful poster on the Money as You Grow website that you can print out. Posting it somewhere the whole family can see will remind you to keep teaching the lessons and gauge whether your kids have learned the milestone concepts.
"My goal is for every American family to have it on their refrigerator," Kobliner said.
I like Money as You Grow for a number of reasons:
It communicates the most important concepts -- delayed gratification, opportunity cost, the difference between needs and wants, the value of compounding and starting early with saving -- in ways kids can understand.
It talks a lot about credit cards, explaining that a credit card is a type of loan and that carrying balances will cost you big time. Many financial-literacy tools developed by banks and other lenders don't emphasize the importance of avoiding credit card debt. What a surprise.
It gives concrete examples. For Milestone No. 11, "The sooner you save, the faster your money can grow," it suggests telling your child that if he sets aside $100 every year starting at age 14, he'd have about $23,000 at age 65. However, if he begins saving at age 35 he'd have only about $7,000 at age 65, assuming the account earned 5% every year.
"Behavioral economic studies show that if you give kids . . . concrete numbers, kids actually save more than if you talk in the abstract about savings," Kobliner said.
Money as You Grow isn't exhaustive, and it isn't meant to be. We've been teaching our daughter additional lessons as she's grown and hope to teach her more in the future (she's 9 now). Here are the concepts the Money as You Grow project says you should teach at various age brackets, along with some of my own suggestions.
Ages 3 to 5
You need money to buy things.
You earn money by working.
You may have to wait before you can buy something you want.
There's a difference between things you want and things you need.
Here's what I taught, in addition:
Save something, always. We made savings a mandatory as well as voluntary activity. In addition to suggesting our daughter could save up to buy what we wanted, we made sure a portion of every dollar went into the "savings" bank of her Moonjar money bank.
Share something. This concept is a tough one, even for some older people. But we told our daughter she needed to set aside a portion of her money to share with others. She didn't get this at all -- why should she share her money? -- until we read a book on cheetahs and she realized she could give money to help them. A donor was born.
Advertisers don't always tell the truth. We talked with our daughter about toys that seemed great on TV but that weren't that fun to play with when she actually got them. We also pointed out that some things, such as healthful food and free ways to have fun, aren't typically advertised on TV.
Ages 6 to 10
You need to make choices about how to spend your money.
It's good to shop around and compare prices before you buy.
It can be costly and dangerous to share information online.
Putting your money in a savings account will protect it and pay you interest.
Here's what we're teaching, in addition:
There's a connection between risk and reward. Sitting in the house may be safe, but it isn't very fun. Riding bikes, snorkeling and gymnastics -- three favorite activities -- involve some risk but offer the reward of a good time. Then there are riskier activities, such as riding without a helmet, where the rewards simply aren't worth the risk. We want our daughter to learn to take reasonable and measured risks, in life and in her finances.
Entrepreneurs chart their own courses. We've helped our daughter set up many, many lemonade stands and talked about other businesses she could start. We want her to know that while working for someone else isn't necessarily a bad deal, being an entrepreneur has more upside (as well as more risk; what if no one buys her lemonade?).
Ages 11 to 13
You should save at least a dime for every dollar you receive.
Entering personal information, like a bank or credit card number, online is risky because someone could steal it.
The sooner you save, the faster your money can grow grow, thanks to compound interest.
A credit card is a type of loan; if you don't pay your bill in full every month, you'll be charged interest and owe more than you originally spent.
Here's what we'll also teach:
Credit cards are a tool; credit debt is dumb. Credit cards are the best way to buy online and to pay for large purchases, because they offer more consumer protections than other payment methods do. But you have to keep track of what you're spending so that you don't charge more than you can pay off each month.
Ages 14 to 18
When comparing colleges, be sure to consider how much each school would cost you.
You should avoid using credit cards to buy things you can't afford to pay for with cash.
Your first paycheck may seem smaller than expected, since money is taken out for taxes.
A Roth IRA is a great place to save and invest the money you earn.
Here's what we'll teach, in addition:
Retirement savings should be your financial priority. Retirement will cost a lot, and it will take a lifetime of savings to ensure a comfortable one. It's never too early to get started, but it can quickly become too late.
There's a difference between good debt and bad debt. All our sermonizing on the evils of credit card debt could give our daughter the impression she should never borrow a dime. But Mom and Dad are unlikely to buy her a house, and while we hope she won't need loans for college, she may. She'll also likely need lines of credit for that successful business she's going to launch. We want her to understand that some debts can be an investment in her future, as long as they're taken on in moderation.
Budgets are a tool, not a punishment. A budget can help you get the things you really want without wasting money on stuff you don't.
Age 18 and up
You should use a credit card only if you can pay off the money owed in full each month.
You need health insurance.
It's important to save at least three months' worth of living expenses in case of emergency.
When investing, consider the risks and the annual expenses.
In addition, we'll tell our daughter:
Pick the right field of study. Both her dad and I love our jobs, and they pay well. A career that interests you is important, but you want to make sure you'll be paid decently and that there's strong demand for those jobs.
Credit scores matter. Before she heads off to college, we'll talk about the importance of paying bills on time and using only a fraction of her available credit.
Leave retirement money alone for retirement. She'll have lots of temptations and perhaps some great rationalizations for raiding her nest egg, but it's almost always a bad idea. Not only would she lose one-quarter to one-half of her withdrawal to taxes and penalties, but she'd lose all the future tax-deferred interest the money could have earned. That means every $1,000 withdrawal costs her $10,000 or more in lost future retirement income.
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy." Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money.