It’s a sad fact that the public school system in the United States does little to introduce children to the concept of money and financial responsibility. Even at the college level, colleges typically only offer such classes as an elective, if at all. The results of this lack of financial education are clear: a report from the National Endowment for Financial Education found that only 20 percent of teenagers have basic financial literacy.
For these reasons, parents need to take charge of their children’s financial education. In fact, children whose parents teach them about financial literacy from an early age are more likely to make intelligent, balanced decisions as they grow older. Keep in mind that “early” may be younger than many parents think—a study conducted by the University of Cambridge found that children as young as seven had already forged financial habits that color their perception of money and personal finance. Some tips for introducing children to financial concepts at a young age include:
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Teach the concept of opportunity cost.
One of the most basic concepts in personal finance that children need to understand is opportunity cost. While this may seem like a high-level idea, opportunity cost really just means that every decision involves a trade-off. Parents can show their children that this is true by involving them in everyday choices, even when they are quite young. For example, at the grocery store, parents can ask their children to decide between two different items while explaining to them that they cannot buy both. Consistently doing this helps children start to think about what they have to give up when they decide to make a purchase. Even among wealthy families, money is not unlimited, so it is important that kids realize each decision they make has an impact on their future choices.
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Demonstrate delayed gratification.
In personal finance, delayed gratification is a concept that relates to everything from saving for college to investing in stocks. When children understand the benefit of resisting an immediate reward in order to obtain a better one later on, they start to develop the discipline they need to save money. Children are by nature impulsive, so it’s important that parents do not give in to every purchase request they make. When children want something, they may throw a tantrum when their parents say no. However, parents can model delayed gratification by pointing out a purchase they want to make and explaining why they’ve decided to put it off. In addition, kids who receive an allowance should be encouraged to think carefully about how they spend their money. Help them understand that spending their money as soon as they get it will only make it impossible to buy something better and more expensive—for example, a video game or a new bike—down the line.
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Introduce the concept of interest.
When kids are very young, they may have trouble understanding the abstract concept of interest. However, it is possible to introduce the concept by using a bank account. Parents should take their kids to the bank to open a savings account, and then review the monthly statements with them as they arrive in the mail or online. Doing so will show children how the money in their account grows over time, thanks to the interest it earns. As math skills improve, parents can actually do the calculations with kids to see where the numbers come from and perhaps even begin to predict the figures on the next statement. In addition, parents may want to consider sharing their credit card statements with their children so that they can see the other side of interest. Doing this can serve as a launching pad for discussing the dangers of excessive credit card debt.
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Play games that require financial literacy.
Parents tend to think of board and video games as a waste of time, but some options can actually instill valuable financial lessons. One of the classic examples is Monopoly, which requires players to calculate interest rates, plan for the future, and think about a realistic budget. However, Monopoly is not the only option. Sim City and Starcraft are two video games that make players think critically about the resources they possess and consider the future in an unpredictable and dynamic landscape that isn’t far off from a real economy. Playing these games with younger kids can help parents teach important lessons and assess their children’s understanding of the concepts. Parents should encourage their kids to ask questions as they play as well.
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Share the repercussions of bad decisions.
In general, parents try to shield their children from the repercussions of bad financial decisions as much as possible. However, this is not always the best strategy for instilling financial responsibility. Watching children make mistakes can be hard, but the lessons they’ll learn from them will stick. For example, if a child wants to squander all her birthday money right away, it may hurt later on a trip to the amusement park when she realizes she has no money for a souvenir toy. However, she may grasp the point better than if her parents simply dictated how she should spend her money. For the next holiday, the child may want some tips on how to make her money go further, which is the point at which the parent can give advice. Importantly, parents need to avoid the impulse to always step in and replenish lost money, or the child will likely soon forget the lesson. Ultimately, it is better to make a mistake with $50 than with a couple hundred.