Does talking about money with your children make you uncomfortable? Surveys have found that many parents are more comfortable talking with their children about drugs, sex, and alcohol than their family’s financial situation, and a T. Rowe Price survey found that fewer than one-fourth of kids talk with their parents about money often.1
This might seem completely irrational, but breaking through barriers that have been part of our culture for generations can be difficult. However, there is no better time to get started than right now. Too many children grow up without basic knowledge of things like credit cards, budgeting, and savings and end up unnecessarily learning lessons the hard way.
To be fair, schools are slowly doing a better job of educating children about basic financial topics. 23 states now require students to take a personal finance course to graduate high school, up from just seven states in 2007.2 But generally speaking, financial education in the United States is nowhere near where it needs to be.
The first thing you can do is to make a point to talk about money openly. Start with simple topics. For example, a colleague told this story: After seeing him use his credit card to pay for meals, his elementary school-aged daughter assumed it was an unlimited source of money. This led to a simple but highly productive discussion of what a credit card is and why we still need to watch what we spend even though he can buy on credit.
Money topics your kids need to learn about (but probably won’t learn at school)
Why is it important to talk to your kids about money? Research shows that “when students receive financial education, they borrow more sensibly, shifting from high-cost to low-cost financing. Financial education graduation requirements increase applications for aid, the likelihood of receiving a grant, and acceptance of federal loans, which are all low-interest means of borrowing. At the same time, financial education decreases the likelihood of holding credit card balances, and the education reduces higher-cost private loan amounts for borrowers.”3 We’ll get to some of the ways you can get your kids moving in the right direction in the next section, but here are some of the basic money topics that even adult Americans fail to grasp.
- Credit. Most kids graduate high school with no idea of how credit works. Credit card companies, fortunately, aren’t allowed to prey on college students quite as much as they used to, but it’s not difficult for a college-aged person with a job to get a credit card.
It’s also common for young adults to have no idea how credit reporting and credit scores work. They should understand that paying their bills on time every month is the single most important factor in their credit score. This might sound like common sense, but you might be surprised at how many kids reach adulthood without knowing it.
- Budgeting. 18-year-olds may or may not need to make a formal budget, but some basic budgeting skills can be extremely valuable before your kids leave home. For example, if your son has only $100 to spend, how should he break down his spending? First, he should pay the necessary expenses. Then he should consider saving a specific percentage of what is left and spend the remainder on non-essential costs. We'll get into some ways you can introduce this later.
- Investing. A basic idea about investing is important for everyone to know. That doesn’t mean that you need to invest in stocks and bonds on your own. But almost everyone has (or should have) an employer-sponsored retirement account at some point. So, you want your kids to understand why they should participate in their employer’s 401(k) and the various investment options. They also should understand the difference between investing and putting money in a savings account.
- Taxes. Most of today’s young adults will never have to fill out a paper tax return or calculate how much tax they owe manually. But far too many get their first paycheck and have no idea why money has been taken out of it. Some basic knowledge about federal, state, and Medicare taxes and why we pay them can be extremely useful as your kids go out on their own.
- Inflation. There hasn’t been a better teachable moment when it comes to inflation in the past 40 years than right now. Your kids don’t need to learn any heavy mathematics or economics lessons, but understanding what inflation is could put your child in a great position. It’s a foreign concept to many young adults that money sitting in a checking account (or under the mattress) can actually lose value over time.
Activities to help your kids learn about money
Obviously, not every type of money lesson is appropriate for every child. For example, you probably wouldn’t want to explain to a 5-year-old how credit scoring works, so here are some basic money lessons you can consider depending on how old your kids are.
Elementary school
Children in this age group are generally just starting to form their concepts of what money is, where it comes from, and how it works. So, consider starting with some simple lessons. Maybe explain how different items have different prices when you’re at the grocery store.
This could also be a good age to start your kids on a small allowance—they don’t need much at this age, and it can help teach valuable lessons when you’re shopping. For example, you can explain the trade-offs of spending. Your daughter can learn that her $5 could buy a large coloring book or a small one and one of her favorite snacks. This sounds simple, but planting these basic seeds goes a long way toward learning budgeting skills. You can even have them perform some chores in order to get the allowance to introduce the concept of earning money.
Middle school
A CNBC survey found that only 15% of parents speak with their children more than once a week about household finances.4 But that isn’t enough. Middle school is a good age to start including your children in basic financial decisions. For example, when you’re shopping at the grocery store, you can explain how sales work and why you’re choosing one product over another similar one.
High school
Be open with your high schooler about some of the larger expenses in your life. Why did you choose to buy your car instead of another model you liked? How do you plan for larger expenses like vacations?
Another strategy that can be especially effective with older children is to give them a somewhat higher allowance but make them responsible for buying certain things they need (in other words, the allowance isn’t just fun money anymore).
College
Financial giant AIG gave a six-question financial literacy quiz to over 25,000 college students. It contained basic questions about inflation, credit reporting, emergency funds, and more. Fewer than half of all participants got more than two out of the six questions correct—a sad 33% success rate.5
In college, your “child” will technically be an adult, which brings with it the freedom to discuss real-world money decisions they can make. For example, if your child has a job in college, maybe start the discussion about getting their first credit card and their plan for using it. It’s equally important to discuss the concept that using a credit card is not “free” money, they’ll have to repay the money they borrowed plus interest in most cases. It’s also a good time to describe the difference between credit cards and debit cards.
The bottom line on teaching kids about money
We’ve gone through quite a few money concepts and lessons that too many American children don’t learn at school. And if there’s one key takeaway here, it’s that talking openly about finances can make more difference than you can probably imagine. You don’t have to share specifics, like your salary and debts, if you aren’t comfortable doing so, but including your children in increasingly important financial discussions as they get older can give them a head start on their own financial well-being.
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