At what age do you start talking to your kids about money?
If you’re asking that question, most pros say, you’re already late.
“It’s never too early to start learning about finances — especially now when many parents are having to cut back on kids’ activities,” said Stacy Francis, a personal financial adviser and founder of Savvy Ladies, a group aimed at educating women about money.
One of the biggest mistakes you can make when it comes to kids and money is to NOT talk to your kids about money. Bad habits now lead to bad decisions that will stay with them a lifetime.
“The main reason that you need to educate your kids on money is that, if you do not, they will always be asking you for it!” quipped Jerry Lynch, a financial adviser and owner of JFL Consultingin Fairfield, NJ.
Here are five things your kids need to know about money.
1. The difference between wants and needs.
Kids are all about want-want-want (wha wha wha). They see something, they want it. They don’t think about the mortgage payment or the phone bill; they think about stuffed animals, new sneakers — and candy. It’s your job to teach them the difference between a want and a need — and to make sure the necessities get met first.
“Wants are things you desire and needs are necessities or essential items you literally can’t live without,” said Lisa Dworkin, author of the personal-finance blog “Lisa Dworkin’s Blog” and the text book, “Become a Money Master.”
This is a lesson you can start very young — and can be a regular discussion you have when making family decisions.
One key part of that exercise is to prioritize the wants category.
“If you know the difference between your wants and needs and can rank your wants, then you’ll spend your money on the things that really do make you happy,” Dworkin explained.
If you see certain “wants” keep slipping to the bottom of the list, just shave them off. Those are probably “likes” not “loves” — and you can save a few bucks by just dropping them from the list.
2. Why the family’s going to Disney World instead of Paris.
You have to teach your kids to shop smart — and what better way than to involve them in the financial decisions of the family.
Talk to them about how to stretch a dollar, whether it’s clipping coupons at the grocery store — or deciding to take a vacation in the U.S. instead of to a foreign country when the dollar’s down, Francis advises.
When she’s at the grocery store, she explains to her five-year old that she bought the cheese that was on sale to have some extra money left over for other things, and lets her help use the calculator to crunch the numbers.
“She doesn’t completely understand that $2 for a loaf of bread is substantially better than $5, but that’s not the point — she’s seeing that I’m thinking, planning and doing my best to handle our money well,” Oxenreider said. “We keep it fun, so she stays engaged.”
Lynch has another fun exercise: If the kids help you clip coupons, maybe use part of the savings as a bonus for their account or toward a family vacation. “As they see there is a benefit for them, they will become more involved in the process,” he said.
3. How credit cards work.
Credit cards are easy money but that doesn’t mean they’re free money — and that’s an important lesson to teach your teenager when they start wanting to go to the mall without you.
“Help your kids get their first credit card and learn how to use it wisely,” Francis suggests. Teach them to set up a budget of how much they can afford to spend on that credit card per month — and set a date for when they’re going to pay it off.
It’s good to give them a little leash, the pros say — to build their financial independence. You can’t hover over them and press all the buttons for them. But make sure you’re watching what they’re doing — you have to “stop credit-card conundrums in their tracks” Francis advises.
If giving your teen a credit card scares you — get over it. You should get them a credit card and teach them how to use it — it’s an important part of establishing and building their credit score.
Just don’t micromanage them.
“They’re going to make mistakes,” Dworkin said, and that’s OK. “You should be there to guide them but not to jump all over them. Act as a guide, not as the decision maker.”
One safe option for both of you: A pre-paid credit card.
4. The importance of compound interest.
It’s not enough just to teach your kids that they have to save — you have to teach them how to save smartly and have their money working as hard for them as possible.
If you put all that tooth fairy and birthday money in savings account earning 1 percent or less a year — it may come as a huge disappointment when they grow up and find out that chunk of money isn’t nearly as large as they thought it was.
Compound interest is when you are earning interest not just on the principle amount invested, but on the entire amount as the account grows and earns interest. In other words, you’ll be earning interest on your interest.
“Show children how their money is growing (earning interest) just by being in the bank,” Dworkin said. “They don’t have to do anything!”
When they become adolescents, she advises showing them comparisons to illustrate the difference that an investment would make with interest — and with compound interest.
Most savings and money-market accounts have compound interest. Most CDs do not.
Dworkin recommends online banks such as Discover, Ally or ING as they tend to have the highest interest rates.
5. How to buy a stock.
Dworkin also suggests opening brokerage accounts for your kids — teach them how to take part of their total holdings and put it into something that’s going to make more than 1 percent a year.
She opened brokerage accounts for her kids when they were five. Of course, she managed the accounts then, but later recommends allowing kids to partake in the decision-making process.
Remember: The amount of risk you can have in your portfolio is at its highest when you’re young and decreases as you get older. Dworkin said she’d go as high as 80 percent for kids — having 80 percent of their money in equities or other high-yield investments. If they’re young, the other 20 percent can be in a savings account or money market. As they get older, move 5 percent into a checking account and keep the other 15 percent in CDs. CDs don’t have compound interest but they tend to have higher interest rates, which makes them an attractive, yet safe, option.
Maybe you put all that tooth fairy and birthday money into the brokerage account and use their allowance for the checking, savings account or CDs.
As they get older, let them help pick the stocks. If that seems daunting, have them invest in what they know — Mattel , Disney , McDonald's , Sony or or other kid-focused companies. Hey, “investing in what you know” worked for Warren Buffett, one of the richest men in the world, why not your mini-Buffett?!
Dworkin said her kids invested in Hasbro during the Pokemon craze — her kids learned a great lesson about making money off of a trend, not just spending their parents' money on it!
And when they graduated from high school, she didn’t just buy them something that they may or may not like, or that may or may not last — she dumped more money in their brokerage accounts.
If you’re nervous about making these kinds of decisions for your kids because you don’t know a lot about money yourself — that’s no excuse.
“Don’t worry in the beginning about not being able to perfectly explain how mutual funds work,” Oxenreider says. “Keep it simple so that the foundation is solid. The other stuff will come as they grow.”
“The earlier they learn to understand money, how it works, and how they should spend it, the better off they will be as adults,” Lynch said. The alternative is much worse: “The things that we do not address as parents mean that their habits will only get worse over time,” he said.
Not only is it never too early to learn about money — it’s also never too late to learn a few things.
“As you teach your children the importance of financial independence, you may learn a few things yourself!” Francis said.
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