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By Jennifer Ryan Woods
If there’s one subject that has the ability to impact kids throughout their entire lives, it’s personal finance. Unfortunately, it’s a subject that no one wants to teach them.
“The practicality of teaching [finance to kids] is so important…it’s the one topic that they’ll actually use for the rest of their lives, everyday. But it’s the one topic that isn’t really taught,” says Gregg Murset, chief executive of My Job Chart, an online tool that teaches kids about responsibility, managing money and helping charities.
Because most schools aren’t teaching finance, the responsibility falls to parents. But many parents are reluctant to broach the subject, often because they don’t feel qualified or they think talking about money will make their children worry. In a recent study 72% of parents reported at least some reluctance talking to their kids about finance. But that doesn’t mean they don’t want their kids learning it — 91% believe it’s appropriate for kids to learn about financial matters in school and 75% said there should be a personal finance requirement to graduate.
Teachers agree — in a separate study 89% said students should take a finance course or pass a competency test for high school graduation — but only 29% of teachers are actually teaching it. There’s been some progress getting more public schools to make courses mandatory, but it’s far from being a standard part of school curriculum, which means the onus is on parents to ensure their kids have, at the very least, a basic financial understanding.
The following is a list of terms that experts say every kid should learn. It includes the age at which kids can generally being to understand the concept as well as an age-appropriate explanation that parents can use. (Even if your kids are into their teenage years, it’s never too late! Go through the list to make sure they have a good understanding of each term.)
1. Saving(s): Age 4+
Saving is one of the best topics to introduce at a young age. It’s easy for kids to grasp and can have a huge impact on those who embrace it early. “Saving means not using all of your money right away, but instead putting it aside for later,” says Stacy Francis, president and chief executive of Francis Financial.
There are plenty of examples parents can use to illustrate, here’s one: Start by giving your child two small pieces of candy during the day. Let them eat one right away and save the other until after dinner. Then each day for a week, give them two pieces but have them save one in a special place. When the week is over, they’ll be excited to have a bag full of candy. Explain that saving money works the same way — when you regularly put a little bit aside, in time it will add up to something big.
2. Budget: Age 8
A budget is plan that you make to keep track of your money and where it is going. One great way that a lot of parents teach kids how to budget is with “give, save, spend jars.” Whenever the child earns money they divide it between the jars. The “save” jar is money that’s intended for a longer-term goal; money in the “spend” jar can be used any time for smaller purchases; the “give” jar is money that will go to a charity of their choosing. The give jar, in particular, is great for getting kids to think about helping others while allowing them the freedom to choose where to donate their money.
Niv Persaud, founder of Transition Planning & Guidance says it’s also a good idea to get kids involved in the family budget, or “spending plan” as she calls it. “Involve your kids in developing a spending plan for an upcoming vacation. Let them see how you budget and save for these memorable trips. Start with small tasks and as your kids grow, expand their role. Once you’ve selected a destination, ask them to calculate how much you need to save for travel, food, lodging and entertainment. When you’re on vacation, ask them to keep track of spending.”
3. Loan: Age 8
A loan is something that is borrowed, often money, which has to be paid back with interest (See #5 below). Most kids get the basic concept of a loan because chances are, at one time or another, they’ve lent something to a friend or sibling and expected to get it back.
Start by explaining some of the reasons people take out loans. For instance, because it costs a lot of money to buy a house most people borrow money (take out a mortgage) to pay for it. Even kids know that $300,000 is a lot of money, so when they hear that’s the average price of a house they can understand why most people borrow money to cover it. Car loans and student loans are also good ones to discuss – especially the latter for kids who will be taking out student loans to pay for college.
While taking out a loan isn’t a bad thing, parents need to stress that when you do take on a loan, it’s your responsibility to pay it back.
4. Debt: Age 8
Loans and debt can be explained together. Like a loan, a debt is money that you owe someone that needs to be paid back. Once again, a mortgage can be a good way to illustrate how debt works. (Other types of debt, such as credit card debt, can be introduced a bit later on — See #6)
Murset says parents should discuss their own mortgage with their kids by explaining that they borrowed money – took on debt – to buy their house and that they need to pay it back a little bit each month. He adds, it’s critical to show the kids the mortgage statement so they can see how much is paid each month and the interest. That way they can see the cost associated with debt and that it never goes away until it’s paid off. Murset says, “kids need to understand that once you have a debt, it doesn’t go away until you’ve taken care of it.”
5. Interest: Age 8-10
Interest has two sides: it’s either something you pay when someone lends you money or something that you earn when you lend money to someone else. Elizabeth Grahsl, Vice President of Prosperity Bank says, you would earn interest if, for example, “your sister runs out of her allowance but needs money this weekend. You could lend her $20 but charge her $2 in interest, which she will have to pay you back next week.” You can also make it into a game to illustrate how it works: Ask to borrow a few dollars from your child’s piggy bank and then set up a schedule to pay it back over the next month with interest.
Grahsl adds, “explain to older kids how you pay the bank interest on your car loan or mortgage each month. Also point out that the bank pays you interest on deposits you gave them.”
When kids are older and can calculate simple percentages, have them do some math to see how interest adds up. Show them a credit card agreement that charges 15% interest and have them figure out how much extra money you would have to pay to carry a balance of $5,000 or $10,000 on your credit card, versus if you paid it off right away.
6. Credit/Credit Card: Age 8-10
Credit lets you buy something without having to pay for it right away. For example, if you use a credit card to buy a new bike that costs $200, the money doesn’t come out of your bank account. Instead the credit card company pays for the bike. Then they send you a bill and you have to pay them back the $200. If you don’t pay them back right away, they will charge you extra money (interest). The longer it takes you to pay back, the more money you will owe in the end. While credit cards are necessary to have — you can’t buy a sandwich on a plane without one — kids need to understand that they should only be used to buy things that they can afford to pay off right away.
If you’re at the store with your child and they forget their money but they absolutely have to have that special toy, let them borrow the money, say $10. Tell them, however, that they have to pay you back right away when you get home. If they don’t, start adding on interest and continue to until they’ve paid you back.
Parents should also explain how a debit card is different as it takes money directly from your checking account. Murset suggests referring to debit cards as “money suckers.” “When you’re at the store and you slide the debit card, explain that the card is sucking the money right out of your account at that very moment.”
7. Taxes: Age 10-12
Chances are most kids know the word but few understand what taxes are. Here’s the explanation: Taxes are payments that go to the government for the work that it does, such as improving schools and fixing roads. They’re taken right from your paycheck and the amount you pay depends on how much money you make.
Jeff Nauta, Principal with Henrickson Nauta Wealth Advisors says, “A great way to teach kids about taxes is to apply a tax to their allowance.” So rather than giving them their full allowance each week, take away a percentage and put it in a family jar to be used toward a household expense.
You can also explain to older kids that doing certain things, which have a positive impact such as donating money to charity or installing solar panels on your house, can lower your taxes.
8. Investment – Age 10-12
An investment is something that you spend money on, which you believe will earn you even more money (a profit) down the line. John Fowler, a wealth manager with McElhenny Sheffield Capital Management, says he’s teaching his 6-year-old daughter about investing by having her take money out of her piggy bank each week to put into an “investment account” (also known as “the box in daddy’s filing cabinet).
Fowler says the idea is that if she leaves $10 in the box, she’ll make an extra $1. “It took a couple of months of forcing her to put the money in the box in the filing cabinet. I set an alert on my phone to go off every week and I would add one quarter a week for every $10 she would “invest.” By keeping the time frame we use to review her gains relatively short, weekly, it kept the concept front of mind and it became fun for her.”
Kids should know, however, that although people invest in things that they hope will make them more money, it doesn’t always happen that way. That’s why it’s never a good idea to put all of your money in a risky investment, because if you do and the investment fails, you could loose it all.
9. Stock – Age 12+
A stock is a piece of a company. When you own a stock of a company, you own a small piece of its business. Every stock has a price and that price can go up or down, depending on what’s happening at the company.
Stock movements are best illustrated to kids with an example of a company they know. For instance, say you bought one share of Apple AAPL -0.12% stock for $5 . If the company sold a ton of iPhones, which is good for the company, it could make the stock price go up to $8, meaning you would have earned $3 on your investment. On the other hand, if Apple didn’t sell a lot of iPhones and the stock fell to $2, you would have lost $3. Most people don’t own a single piece of a stock (a share), but tens, hundreds or thousands of shares. And most people also own stock of several different companies. The “stock market” is where people buy and sell (trade) their stocks. There is an actual place where stocks are traded but it can also be done over the Internet.
Learning about stocks can be particularly fun as kids get older. There are a lot of online games and apps they can use to create virtual stock portfolios, which can show them how stock prices move and how much money they would have made or lost if they been dealing with real money.
10. 401(K): 14+
As kids enter the teenage years, it’s a good time to begin preparing them for some of the things they will likely encounter once they enter the workforce, one of which is a 401(k) plan. Francis explains a 401(k) as “a savings account for retirement savings offered by your employer. The money that you put into a 401(k) is taken out directly from your paycheck, and is intended solely for retirement. You can’t withdraw it until age 59½.”
Francis adds, “You don’t pay taxes now on money you put into your 401k…This is a great deal because the money that would have been taken out in taxes is instead allowed to grow and compound your entire working career. Only when you withdraw it in retirement do you pay taxes.”
The money that’s put into a 401(k) gets put into different investments. The ideas is that the investments will increase over time, so the money in the 401(k) will grow as well.
11. Credit Score: Age 15+
Once you plan to give your child use of a credit card, you must explain what a credit score is, Persaud of Transition Planning & Guidance says. Here’s how she describes it: There are three credit bureaus, which calculate your “credit score” or how you use your money. The goal is to have a high credit score – more “likes” by the credit bureaus. The way to receive more likes (a high score) is to have a long history of paying your bills on time. When you don’t pay your bills on time or you have too much debt, your score gets lowered.
It’s important to emphasize that a good credit score will help in the future if you want to borrow money to buy a house or a car. Meanwhile a bad credit score can make it difficult for you to borrow money.