By: Nicole T. Strbich, CFP®, CPWA®, EA - Director of Financial Planning
As many parents embrace summer and recover from a challenging stint of homeschooling their children, there is one aspect of education that will stay primarily our responsibility: teaching our children about money.
According to the 2020 Survey of States by the Council for Economic Education, 21 states require students to take a course in personal finance, 25 states require high school students to take a course in economics, and 5 states (plus D.C.) do not include personal finance in their standards at all. According to this report, Ohio does not require high schools to offer a standalone course, as the required coursework is integrated into another course. While many parents believe that their children will learn everything they need to know about personal finance in school, a 2019 survey by Nitro (a student loan education website) found that 84% of their respondents didn’t think that high school prepared them to handle their money.
The lessons, ideas, and methods available for parents are almost endless, but here are few to consider:
Cash in Hand
In a world of credit cards and one-tap pay systems, it can be more difficult to ‘see’ how money is saved and how quickly it can be spent (and feel the pain of losing it), so it is important to use physical cash as you work with your children. A great place to start is with a piggy bank. One bank, called the “Money Savvy Pig” (designed for ages 4-11) takes saving a step further and includes four labeled compartments: save, spend, donate, and invest. This educational tool allows parents and children to discuss the importance of each of these items and the targeted allotment for each slot. Once children are older and have moved on to higher math and more advanced concepts, going virtual with savings and investing makes sense.
Wants vs. Needs and Opportunity Cost
Start discussing what purchases (of yours and theirs) are ‘wants’ and what purchases are ‘needs’ with your children. Consider asking your kids to calculate the return on investment of the new toy they want. By estimating the hours of enjoyment that they would gain out of the purchase and determining the price per hour, they may decide to go another direction with their discretionary funds.
Consider setting a limit on discretionary purchases so that children can make decisions on how to spend the funds and understand opportunity cost. If they use their entire budget to purchase their souvenirs on the first day of the trip, they may not be able to purchase more the rest of the trip. To avoid being the keepers of their budget, provide kids with a set amount of cash (or prepaid debit card) so they always know what they have remaining.
Intro to Investing
As children get older and savvier about money (potentially in middle school, but you know your kids best), it is a great opportunity to teach them about the stock market and investing. One way to get started with this an online stock market simulator program to let kids test their ideas and see how investments move up and down. They can pick companies that interest them and follow the news to understand market movements. Once you both are comfortable, you could open a custodial account and deposit real money. This is also a great opportunity to discuss the concept of compounding interest and the Time Value of Money calculation (you can find calculators online).
College campuses are frequented by credit card companies offering free food and t-shirts for signing up for credit cards (they know the audience). The best time to teach good credit practices is before they step into this world. Understanding fees, credit limits, payment schedule and the impact of missing payments are important conversations. If your child makes purchases that would require them to carry a balance, they should know how long it will take them to pay it back and the total interest paid. If you co-sign for a credit card with your child, make sure they understand that your credit can be negatively impacted if it is not handled responsibly. Credit scores are like a GPA; it is much harder to bring a score back up after it falls than to keep it high in the first place.