The Role Of Parents In Teaching Financial Literacy
How Parents Can Lead By Example And Encourage Open Communication
Parents are responsible for ensuring their children are sufficiently educated to ensure they are prepared for the future. Children who enter adulthood without a basic understanding of personal finances and similar money-related concerns are likely disadvantaged. Many American adults today struggle with their finances, as roughly 60% of adults live “paycheck to paycheck,” and approximately 20% of older adults have no retirement savings.
Teaching financial literacy is essential, as children often need more exposure to these topics in school. As children grow, parents should continually engage them in discussions about appropriate financial concepts for their age and strive to instill good habits.
Leading by Example
Most adults deal with personal financial matters continually in their lives, which is evidence of their practicality and also makes it possible to teach children by example. Good starting points for younger children may include explaining how money is earned, what money is used for, and becoming familiar with the values of coins and bills.
The process of shopping at the grocery store is an excellent potential learning experience. Here, you can effectively demonstrate the concepts of preparation by making a shopping list, comparing products and prices, and completing purchase transactions.
Encouraging Communication Regarding Money
A study by T. Rowe Price revealed that 37% of parents felt hesitancy about discussing money-related issues with their children, with some experiencing embarrassment. Many busy parents seem to find that there never seems to be a “good time” to talk about money.
Making time for these initial discussions is critical, and the process will become increasingly more accessible. Talking with your children regularly about finance fundamentals is an excellent way to help them develop a healthy relationship with money.
Important Financial Topics to Discuss
The following are four of the most vital topics for parents to address with their kids.
Saving Money
Developing a habit of saving money is vital throughout life’s journey. Maintaining an emergency or “rainy day” fund in preparation for the many unforeseen expenses that arise is valuable. In practice, saving money is also fundamental when making a down payment on a car or home and for retirement planning.
Parents should consider implementing these principles by giving an allowance. A regular allowance may help children develop a work ethic and start budgeting and goal-setting. Further, many banks and credit unions offer child savings accounts, which is an excellent next step.
Establishing and Building Credit
As children enter adulthood, they have the opportunity to establish responsible credit-related habits. Your credit history and score often determine whether you obtain a job or an apartment. A consumer’s credit status also may impact the rates you pay for home mortgage loans, auto loans, and car insurance.
Young people should have basic knowledge about the consumer credit landscape in the U.S., including the three major credit reporting bureaus, the basis of credit scores and the importance of periodically reviewing their credit reports for errors or possible instances of fraudulent activity.
Children can gain a basic understanding of the common types of accounts, such as credit cards and other revolving credit accounts and student or car loans, which are installment accounts. Remember to emphasize the importance of closely reviewing the terms and conditions associated with these accounts.
Learning about credit is an opportunity to discuss critical lessons regarding living within your means, differentiating wants and needs, and impulse buying.
The Basics of Banking
Children can learn about banks, credit unions, and other financial institutions. Some of these topics may include:
- The concept of earning interest.
- How checking and savings accounts work.
- Introducing older teens and young adults to other products such as loans and investment accounts.
Identify Theft (Fraud) Prevention
Children in today’s digital financial environment should understand the importance of protecting their personal information and recognizing potential signs of fraud or scams. Some best practices include safeguarding your social security number, creating strong account passwords, recognizing possible phishing attempts, and shredding account statements, tax-related documents, and preapproved credit card offers.
Overcoming Common Challenges
Many young adults will inevitably learn lessons about achieving financial well-being the hard way—by making mistakes. In many cases, children will underestimate the consequences of financial pitfalls or struggle with procrastination. The following are some of the most common problems and strategies to overcome them.
Resistance to Creating and Staying on a Detailed Budget
Too many young people need a system, plan, or accurate understanding of where their money goes to enter the world of work and bills. Work with your child to form a basic monthly budget for organizing and tracking their money. Creating a monthly budget is fairly straightforward, and many very affordable or accessible apps are available, including PocketGuard, Stash, Honeydue, EveryDollar, and dozens of others.
Regardless of the method or application you choose, there are five essential elements to a monthly budget:
- Listing all income sources
- Listing all expenses
- Calculation: income subtracted by expenses
- All financial transactions during the month
- Notes in preparation for the upcoming month
Consider separating your expenses into categories for fixed and variable costs, and remember to include an entry for savings (if possible). Reviewing your monthly transactions is essential to assess how you spend your discretionary or disposable income. Keep in mind that your budget will change and evolve.
Responsibly Managing Debt
Young adults are often susceptible to impulse spending and soon find themselves in trouble with unmanageable debt. Adding your child as an authorized user on your credit card account is one way of introducing them to the world of credit and allows you to monitor their purchases. Some critical lessons include only spending what you can afford and how balances carried forward accrue interest charges.
Convincing Young Adults to Begin Retirement Savings
Many younger adults minimize the importance of retirement savings, as it seems like a very distant concern. The reality is that younger people have time on their side and can recognize tremendous long-term returns. Among the most impactful tools is analyzing the power of compound interest, such as by using a calculator app.
Consider this example:
Initial investment: $500
Monthly (ongoing contribution): $250
Estimated interest rate: 5% (compounded annually)
Balance after 30 years: $201,477
Educating Your Children About Financial Fundamentals
Educating children about financial literacy is a process that will likely benefit them in the future. Data suggests that children who learn the importance of saving, budgeting, and similar topics are likelier to have good financial skills and habits as adults. Many resources, such as lessons and games, exist for children of all ages.
Smart money management is a life skill that parents can demonstrate by example and explain further through discussions. Key concepts include only buying items you can afford, avoiding impulse buys, creating a simple monthly budget, and building and maintaining a good credit history. Here’s how you can teach your child about money.
