Forbes. March 19, 2013. (English) by Halah Touryalai. -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?
Talk to kids about money as early as 5-years-old, or as soon as they realize money buys things.
“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. Lessons about money should start earlier than high school or college where there is sometimes a brief course taught on financial planning.
“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:
- Savings Goal – a savings goal has three elements: (1) what you want to buy, (2) when you want to buy it and (3) how much it will cost at that time.
- Bank – a place that helps us safely store, organize and manage our money
- Check – a way to pay for items where we write a note asking our bank to send our money to someone to pay for our purchases
- Bills – notes letting us know how much we owe for our purchases
- Trade Off – A decision we have to make when we are considering whether to save for something or spend our money
At age 10:
- Interest – money you are paid for lending your money or an amount of money that is added to money you borrowed
- Loan – money that’s borrowed and is expected to be repaid, usually with added interest
- Time Horizon – the amount of time that you will save for a big purchase
- Inflation – a general increase in the price of goods and services over time
- Taxes – money that we pay to the government to help pay for public programs and necessities.
By age 15, teach your children the definitions of:
- Investing – putting money into assets (like stocks, bonds, mutual funds, etc.) to help you reach your financial goals.
- Asset Allocation – how your money is divided among asset classes such as stocks, bonds, and short-term investments
- Diversification – spreading your money amongst various types of investments within an asset class (different kinds of stocks and different kinds of bonds)
- Stock – a share of a company that is sold to the public
- Bonds – an IOU issued by the federal government, state governments, or corporations in which you earn interest, and receive your investment back at a later date
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.
The lessons 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.