Author Johann Wolfgang von Goethe once said: “Many people take no care of their money till they come nearly to the end of it, and others do just the same with their time.” While America’s education system provides lessons on a variety of subjects, not nearly enough time is allocated toward personal finance. Instead, parents are responsible for taking the time to teach their children about money, and research shows they should start almost immediately.
The consequences of poor financial literacy are at record highs as the economy becomes increasingly bifurcated. Young adults lacking financial acumen could easily find themselves saddled with decades’ worth of student debt and an impractical degree, consumer debt at near-usury interest rates, or a woeful retirement consisting of ramen noodles. In fact, negative side effects are already being seen among the nation’s largest generation.
Millennials — generally considered those born after 1978 — are showing problematic financial behaviors. According to a recent study by the Financial Industry Regulatory Authority, only 24 percent of millennials are able to answer four or five questions on a simple five-question financial literacy quiz correctly. That figure drops to only 18 percent among ages 18 to 26. Making matters worse, 46 percent of millennials worried about having too much debt, while 43 percent engaged in non-traditional borrowing in the past five years, including pawn shops and pay-day lenders.
Time is of the essence when it comes to teaching children about money. Recent research by Cambridge University reveals that by the age of four or five, children already understand that they need to pay for merchandise. By the age of seven, most children have grasped how to recognize the value of money, and have developed several basic concepts relating broadly to later financial behaviors.
“The first principle to teach a child is the value of exchange,” explains Tom McGuigan, CFP, Exencial Wealth Advisors, in a phone interview. “The value of doing some sort of work in exchange for some sort of a benefit. This applies to a younger child, maybe even someone who isn’t ready for weekly chores just yet. They could help the family through a special project, such as washing the car, raking the leaves, or shoveling the snow. By helping out and receiving financial compensation, that leaves the groundwork for the notion of work for exchange, work for a benefit. That’s a good principle to teach and will last them the rest of their lives.”
As children grow older and become able to handle more responsibility, parents should teach the value of regular work, along with savings and charity. McGuigan recommends the three-jar concept, which he used with his own kids. “A certain percentage of my child’s allowance would go into the spending jar, where they could buy whatever they wanted. But, they also had a savings jar where they had to make regular contributions. I would also match their contributions in order to teach them about the matching notion of a 401k plan. When that accumulated enough, it was sent to a mutual fund in the child’s name. The third jar was used to place money aside for charity.”
During high school, parents should build on the value of budgeting, investing, and employment. Teenagers should fully understand the differences between wants and needs, and also realize that credit cards shouldn’t be used to bridge a financial gap. They should also understand that investing has risks, and there are different kinds of investing accounts, such as 401k plans and individual retirement accounts (IRAs). A part-time job can also be very educational.
“I like the notion of kids having a job, because it teaches things that are lacking, such as showing up on time, being prepared to work, dealing with co-workers and bosses, and having a good attitude,” explains McGuigan. “I’ve heard so many times that one of the most difficult aspects of hiring new employees is that they don’t know how to be employed.” You may even instill a sense of entrepreneurship at a young age.
Inspiration for lessons can be found through personal accounts from the world’s wealthy. For example, a seven-year-old Warren Buffett sold Coca-Cola bottles door-to-door for a small profit, while Mark Cuban sold garbage bags during his teenage years. The idea is to be creative and start teaching your children as soon as possible. Some people may feel inadequate to teach their children about money, but every parent has knowledge to offer – even if it’s a list of what not to do.
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