The recession and teaching children about money
Anne Fillmore of Branson, Missouri said, “I had to take out personal loans to make it through the economy during the recession. I don’t want that for my children.” Now that the recession is over, many parents are reflecting and coming up with the same sentiment. People were unprepared for the economic downturn and had a difficult time managing. Since things are on the upswing, more parents are looking for ways to teach their children how to manage money effectively. Fillmore added, “I want my children to be smarter than I was and be prepared.”
What parents can teach children
In the school of hard knocks, there is no such thing as Finance 101. Although children learn a lot of skills in school, there is no such thing as a formal money management system for them to adhere to. The job of educating children on how to handle money is left up to the parents. Here are some topics that should be covered:
- Savings. Parents need to start early with teaching children to save. One expert cites the best way to get the message across is to let the child split up their money into four categories: saving, spending, giving, and taxes. The goal is to create a mock “adult money management system” that reflects what they are going to be going through in years to come.
- Discuss interest and how it works. Opening a bank account can help any child visually see how money grows. The biggest lesson here is that you want to teach the child that saving early takes advantage of compound interest. Of course, you have to gauge how much the child understands, but young teens can understand the mathematics behind compounding amounts over a long period of time. They can see how a few extra years can substantially increase savings.
- Create a budget. The next topic to cover is the budget. Every adult should have a working budget and every child should be privy to the information. Phyllis Silverman, VP of PNC Financial, said, “Children over 13 should know what your bills are like—your mortgage, car, utilities, personal loans and taxes should be discussed…it gives them a way to see how it takes a lot of work to make a household run smoothly.”
- Managing debt. Debt is huge in society and you want to teach your child early on how to manage his or hers. Silverman said, “Everyone has heard the saying ‘We all need credit’, well after the recession the new saying is, ‘We all need good credit.’” The key here is to train your child to create good habits. Things like overspending, not watching interest rates and making payments late should all be discussed. The results of each should be shown to the child so they can see how one late payment can crush their credit score.
These are some tips on how to teach children about finances. The biggest effect can be seen when parents mirror a ‘real life’ financial plan and let the child engage in it on a smaller level.
The future savers of tomorrow
Children are the future, and without empowerment over finances, they could end up in the same predicaments many Americas are in. The best thing to do for children is to teach them early on about mortgage, car, home equity and personal loans, along with interest, savings, and budgeting. A good financial education can serve them well as they grow into the consumers of tomorrow.