When children go to school, they learn about a myriad of different subjects, including science, history, and math. Unfortunately, most of the education available to students doesn’t include complete financial literacy beyond, perhaps, how to write or endorse a check. As a result, many have to learn by trial and error when they grow up, unless their parents happen to have knowledge of the subject, and learning about finances that way can lead to a lot of money troubles. Luckily, there are easy ways to teach your kids all about finances and how to handle them, and you don’t need to be an expert.
The first thing you want to do is teach your kids about income and expenses. Help them create a budget to track money coming into their bank accounts and each obligation they need to pay. In most instances with kids or even teens, there will be few numbers on the sheet, so use your expenses and income or make up a mock scenario. Show them it’s important to never let expenses exceed income and to include emergency savings and retirement savings in those numbers. By tracking every dollar and treating savings as an obligation, they can begin to understand how much control they can have over their flow of money.
If you have trouble wrapping your head around budgeting, there’s no shame in asking for guidance from someone more familiar with the subject. Anyone can shout for help if they need to, whether that be a medical professional consulting a pediatric board review question bank for assistance in passing exams or a mom trying to educate her children about money concepts.
Speaking of saving, make sure your kids understand the power of compound interest. Monopoly money may be a good way to show them how the concept works. Visually show them how money saved grows exponentially using interest. For interest, if they saved $1,000 at 8% interest, they would have $1,080 at the end of year one, but in year two, that savings would use the extra $80 plus the original thousand to calculate their new savings number — $1,166.40. If left alone, that compounding would continue indefinitely, growing their wealth.
Be sure they understand the tax obligations associated with the interest they earn, as well.
The above 8% scenario will not happen in a bank. In order to see that kind of interest, parents need to teach their kids about investing and the risks associated with it. In the United States, the Federal Deposit Insurance Corporation (FDIC) insures deposits in qualified banks up to a certain dollar amount. Meaning, that if people deposit money in an FDIC guaranteed bank, they are guaranteed to get their money back if something happens to the bank. The same is not true with investing.
However, in order to grow true wealth, investing is not an option. Fortunately, there is a variety of options available in the investing realm, such as the stock market, bonds, mutual funds, ETFs, and real estate — to name a few. The main concept they should probably understand is the power of diversification.
The key to successful investing is to thoroughly research investments before committing your money and not put all your eggs in one basket because that’s a good way to lose everything. Instead, children need to understand that putting bits of money in a variety of different investment vehicles and sectors gives them a better chance at growth and a lower chance of loss. Doing so can insulate part of your money when times are tough for one portion of the market but excelling in another.
Understanding money concepts and teaching them how to grow their wealth is giving them the tools they need over their lifetime for a better chance at financial security.