High school math can leave everyone scratching their heads in frustration. Students often complain, asking questions like “When will I ever use this?” Despite years of algebra, geometry, and calculus, sometimes you may find yourself feeling like you missed the most important financial lessons in high school. As a teacher, here are a few of the most important lessons in basic finance we should be teaching our children.
5 Lessons in Basic Finance to Teach Children
1. Know the Value of a Dollar
The first lesson in basic finance every child needs to learn is the value of money. Children learn the denominations and equations in school, but understanding that cash is a limited resource is an entirely different lesson. They watch you go to work and pay bills, but take time to teach them that money must be earned.
An allowance is the perfect vehicle to show kids that money is received in exchange for performing tasks. You may be tempted to give your children everything they ask for, but they will learn to appreciate things more if they work for what they have. A weekly allowance or part-time job is a great way for children to practice counting and saving their money.
2. Learn the Fundamentals of Accounting
Once your child begins earning their own money, the next step is teaching them how to manage it. Even if they don’t plan to have a career as a CPA, everyone should know how to balance a budget. Spending more than you earn is a recipe for disaster and insurmountable debt. Showing your children how to set a budget prevents the formation of bad spending habits.
You can begin using a savings account so they can watch the principle amount grow and track the interest earned. They can also record each withdrawal and deposit into their account with their bank book or online banking. Not only will this teach them to be mindful of their spending, but it will also prevent overdraft and late payment fees due to negligence.
3. Start Investing Early
Many adults are too embarrassed to admit that they don’t have a clue about investing. Rather than seeking information, they may avoid the stock markets altogether. While adults can’t reclaim those lost years, you can teach your children so they don’t miss out on big opportunities to begin building wealth.
You don’t want to overwhelm them with the subtle nuances and strategies of investing. However, a rudimentary understanding of investing is one of the most fundamental lessons in basic finance. The daily stock market reports are a simple and easily accessible learning tool. Whether you choose to invest real or hypothetical money, you can offer a hands-on learning experience by tracking their chosen company’s gains and losses.
4. Understand the Power of Compound Interest
Although people don’t reach their full income potential for many years, your children have a huge advantage when it comes to investing – time. If your children begin saving and investing early, they have years to build wealth and take advantage of compound interest.
The best part is that you don’t even need a large amount to begin. If your children put a small amount of money into a high-interest savings account, their money will multiply over and over again. You can make it seem more fun and interesting with the case of the magic penny. You can even enlist the help of videos through your children’s favorite viewing sites.
5. Build and Maintain Good Credit
Credit cards are an important part of building credit in the United States. Most of us start receiving credit card applications even before we turn 18. They are a useful tool if you are responsible and pay your bills on time each month. On the other hand, they are also the cause of many people’s financial stress and debt. Interest rates of overdue balances accrue daily and drastically increase the amount owed.
You may think it wise to avoid credit cards altogether, and advise your children to do the same. However, it is nearly impossible to buy a house or obtain a loan without a credit history or a cosigner with a good credit score. If you don’t want a traditional credit card, there are other options. Instead, consider a secured credit card for your children. It requires a cash deposit which will cap the credit limit. Since secured credit cards report activity to all three reporting agencies, it allows your children to safely build and improve their credit history.
The Bottom Line
Personal finance is a lifelong lesson and we never truly stop being students, no matter how old we get. Where school education ends is where parents must begin teaching their children lessons in basic personal finance. If you can instill good habits and strong values, it will make a positive impact in the success of your children’s financial future.