As chair of the FDIC during the 2008 financial crisis, Sheila Bair presided over the agency at a time of extreme financial uncertainty for many Americans—a time that highlighted the need for financial education for all ages. She believes the earlier children start learning about money, the better. Bair, who has written two children's books about money, said there are three important lessons parents should teach children so they can be financially capable and, eventually, financially independent.
Power of "compound interest"
"Responsible management is something that kids can get when they're quite young," says Bair, who wrote "Isabel's Car Wash" and "Rock, Brock, and the Savings Shock." The latter shows children the power of compounding interest. Twin brothers Rock and Brock accept a challenge from their grandfather. He says he'll give them each a dollar in the next 10 weeks and will double the total each brother is able to save. "Kids learn that they need to start saving early, that the power of that money will grow just by sitting there, in addition to what they add. I think [that] is a very important early lesson," Bair said.
"Rock, Brock and the Savings Shock" also demonstrates the opportunity costs related to money decisions—another key lesson for all ages. "Once you pull that money out of your savings account, it's not compounding anymore; it's gone." Bair said. "You've got to start over again. You do lose a lot of money in the process—that's the opportunity cost."
Impact of spending vs. saving
While stressing the importance of saving, Bair said that children also need to understand when and how to spend. Tell them "it's OK to spend," Bair said. "But make it something meaningful that will last, not just a bunch of junky toys."
Children should be shown through the actions of their parents the importance of buying quality items that are meaningful to themselves and others. "Buying things for other people. Giving to charity. Those are all important lessons as well," she said.
Disclosure: Sheila Bair is on the board of Banco Santander SA, one of Europe's largest lenders.