According to a report by the Employee Benefit Research Institute, only 50 percent of employed Americans state they could get together $2,000 if an unexpected financial situation arose within the next 30 days. This goes hand in hand with estimates from a Statistics Brain report, indicating 25 percent of American families have no savings at all, while an astonishing 38 percent do not have an emergency fund. Many American households have imperfect personal financial health. In some cases, this is the result of the consumer having a paucity of financial education. According to data from the National Foundation for Credit Counseling, 41 percent of consumers graded themselves either a “C,” “D,” or and “F” on their knowledge of personal finance.
This level of unfamiliarity with personal finance among Americans has caused the discussion of children and financial education to become a hot topic. Teaching children about financial education early on provides a base foundation of knowledge for them to build on. Parents do, however, sometimes have a tough time translating the basic essential elements of finance and financial health for children as these concepts are somewhat involved, particularly for a child. These analogies can help simplify some of the basic financial topics.
1. Budget and Debt Accumulation – Child’s Bedroom
When explaining the concept of budgeting and debt to a child, an effective analogy to use is her bedroom. When the child’s bedroom is organized, neat and tidy, he can locate all of her possessions and items generally do not get lost in the mix. When the bedroom is neglected, clutter accumulates. Each day that goes by without cleaning the bedroom, it becomes a more arduous task to accomplish. A messy bedroom is like a messy financial situation — tracking items becomes exasperating and organization, increasingly difficult.
2. Credit – Trust and Behavior
Most children understand good behavior leads to more freedom. If a child behaves well in school, completes all of her chores, and treats others respectfully, she will be allowed to participate in more activities, go out more often, and generally have more fun. This concept can be paralleled with the concept of a credit and how paying bills on time will render a person financially trustworthy. When a person does not pay their obligations, she is not deemed trustworthy and has to work harder to obtain life necessities like a home and a car. Just as when a child misbehaves, she looses freedom in the form of being grounded. The child must then work extra hard and be extra trustworthy to prove that she once again deserves freedom.
3. Repossession – Cell Phone Privileges
Many parents attach conditions to a child’s cell phone or computer privileges. For instance, a child must maintain a “B” average to keep her cell phone, or she can only use the computer if she does all of her chores. If she does not meet these conditions, she loses the cell phone, just as a person loses a financed item like a car or home if they do not meet the conditions of the loan by paying on time.
4. Credit Report — Report Card
One study reported that one out of five adults reported being unaware of the contents of a basic credit report. Although a child may not be able to fully understand the ins and outs of revolving accounts, installment accounts, and a FICO score, they can understand the basic idea of what a credit report is. Just as a report card tracks individual course performance, a credit report tracks performance by individual account. The child’s grades accumulate and overall performance is tracked through a grade point average, just like a credit score numerically represents overall financial performance.