This month we celebrated Father’s Day – a time when children share what they like best about their Dads. Ask a few kids, and they’ll probably say that he is wise, strong, patient, hard-working, and good at solving problems. From a child’s perspective, Dad is often the real-live superhero at the breakfast table who can do just about anything to keep everyone safe and happy.
But there is one area where some Dads – moms-too – may be falling down on their superhero status. This is in the area of making sure their kids know how money works. A 2012 study sponsored by the FINRA Investor Education Foundation found that when asked five basic financial literacy questions, only 14 percent of respondents got all five correct, whereas 39 percent were able to answer at least four questions correctly. That means almost 50 percent did not get passing grade!
If this is the level of financial know-how among adults, how can we possibly model good money behavior to our kids?
Sending them to school to learn the financial facts-of-life is not the answer. The number of states with required financial literacy programs in high school is only 17, according to the Jump Start Coalition’s 2016 biennial survey of state standards, and only seven states test students’ financial proficiency. Until such standards and measurement become nationwide, teaching kids how to stand tall financially is largely up to parents.
So how can Dads bulk up their superpowers in the financial literacy department? First is to get literate themselves, if necessary, taking a class or online course on financial basics. But once they’ve mastered the fundamentals, it’s time to communicate and demonstrate these lessons to their kids. Here are a few ideas for helping your kids become more financially savvy.
Lesson One: Money is not just for spending.
Kids first see money as having one function only: as the means to get stuff, now. Give a young child $5, and he’ll want to spend it all, often looking for things that cost $5. To get kids to consider other uses of money – such as saving and giving – get them to divide their funds into three jars for spending, saving, and giving, and talk about ideas for each. To make the rewards of saving more concrete, consider adding a small match to the funds saved.
Lesson Two: Your credit limit is not money in the bank.
Don’t wait till your child gets her first credit card to teach her the prudent use of credit. Young kids may conclude that plastic is the same as cash by watching how their parents use their cards. Try to get the message across that cards are for convenience only and aren’t a source of additional money. Emphasize that when you pay with a card, you must have money available elsewhere to pay for the purchase. Use the three money jars to illustrate how funds must be taken out to cover the card transaction.
Lesson Three: Money may not grow on trees, but it can grow when it is invested.
As your child gets older, you might introduce the idea that the money in the savings jar can be used to make more money by putting it into an interest-bearing account or into a business. Explain that giving it to a bank is safer – your child can get his money back in full with some extra money called interest – whereas giving it to good businesses may pay much more over time but getting all your money back is not guaranteed. Talk about businesses the child knows about: Apple, Sony, or Disney and how it’s possible to own a “piece” of these businesses either by buying the company’s share or by finding a mutual fund that holds these kind of stocks.
Lesson Four: There are at least two sides to every financial decision.
Children tend to think about financial decisions unilaterally: e.g., choosing an item of lower cost without regard to quality, or thinking that an investment with a high rate of return is better than one returning less. Help your child think through financial decisions by discussing the costs and benefits of their choices. Share with them how you made important financial decisions in your life. This can be very effective training to help them resist the lure of imprudent or hasty financial choices later in life, such as resorting to pay-day loans or get-rich-quick schemes.
Lesson Five: Money management can be fun.
Turn a family event into a money management project that your kids can participate in. Planning a vacation? Give your middle- or high-schoolers responsibility for planning and budgeting for one aspect of the vacation – such as family lunches, or an evening’s entertainment – and as a family discuss these choices and the financial implications of each.
Finally, if you work with a CFP® professional, ask him or her to speak to your child about smart money choices. This can be particularly valuable for kids just about to go to college, where they may be handling money and credit cards for the first time on their own.
This summer, enjoy your superhero status by sitting back in your recliner and imagining the day when your kids will tell their own children “Thanks to my father, I grew up understanding how money works.”
For more information on financial literacy courses and programs, go to Jumpstart.org