Everyone wants to raise their kids to be financially savvy adults, but doing so takes more than just setting a good example.
Children benefit from seeing their parents paying their bills on time, setting aside money for emergencies and keeping their debt load low, but as the saying goes, show, don’t tell.
The importance of teaching kids about money can’t be overstated. Simply put, establishing basic skills early can chart a course for a better life as savers, consumers and investors.
“Starting financial education early, with age-appropriate and relevant information, gives young people more chances to develop the key building blocks of financial capability for adulthood,” the Consumer Financial Protection Bureau wrote in a report in November 2017. “It also gives them the opportunity to build their financial capability before they begin making financial decisions that could affect their financial well-being for years to come.”
Here are a few tips to get the ball rolling.
Teach your children well
The good news is there are plenty of resources that can help you decide where to start. The Consumer Financial Protection Bureau’s Money As You Grow page is a great first stop. The CFPB has lessons and activities sorted by relevant age group and maintains a blog with ongoing lessons that can help facilitate conversations about money with your kids, like this one about grocery shopping.
The CFPB’s page is just one of several resources available. Look for websites, books and other resources that might help your kids learn about money. Warren Buffett’s Secret Millionaires Club is another, for younger kids.
Also, trust your own expertise and share that knowledge with your kids. Like the CFPB’s grocery shopping exercise, explain to your children why you do the things you do, such as paying your credit card in full or why you have your direct deposit split between a checking account and a savings account.
Better investing through apps
In developing his company’s Learn app, Emmet Savage turned to his seven-year-old and 10-year-old sons for product testing. His company, Rubicoin, was setting out to develop two sister apps — one to teach people about investing and one for investing.
The goal of the teaching app was to make the material as digestible as possible. If his kids could get, they had done it right, Savage says.
“If something wasn’t clear, we tweaked it,” Savage says. “But they absorbed it, they got the content.”
The app, released two years ago, seems popular with users, who have given it a 4.5 out five stars rating on Apple’s app store.
“It is a medium that kids understand and in many cases prefer,” Savage says.
There are several other money-related apps, but be sure to do your research about them including reading the reviews.
Practice makes perfect
While education can build a strong foundation, good habits are made through practice.
In the U.S., 15-year-olds with a bank account scored 22 points higher on a financial literacy questionnaire than those who do not, according to a 2017 report from the Organisation for Economic Co-operation and Development.
In other words, kids who interact with banking understand it better. Makes sense, right?
Several banks offer savings accounts and checking accounts for teens. Establishing accounts early can help teens get in a habit of budgeting, saving and planning for future expenses. Check to see what your bank has to offer
Tween and teen years are also a good time to get kids thinking about investing, since they have the advantage of time. Think of all the advice we hear about the benefits of starting a 401(k) early in your career. Imagine the returns you could get if you add a handful or more years to that time horizon.
“The great advantage that a teen has is time. You can have a decades’ head start in investing,” Savage says. “The sooner they can learn this the sooner they can apply it.”
Rubicoin’s other app, for investing, provides users with information on about 90 top performing stocks. It’s up to you to link a brokerage account to the investing app to trade.w
But there are several other apps, including Stockpile, which lets you buy fractional shares — you can invest as little as $5 — in more than 1,000 stocks and ETFs. Parents or grandparents can set up custodial trading accounts for kids. The kids are given their own login and can access their accounts, but need parental approval to trade stocks.
In setting up any account with your child it is important to make sure they understand the importance of the terms. For instance, in a checking, they should know about overdraft fees, or in the case where you opted out of overdraft protection (which is probably a good idea), they should know their debit card will be declined if they don’t have enough money in their account.
Reinforce good habits
So, you’ve taught your kids about money and have given them accounts so they have a chance to develop good habits, now comes the continuing education. Think of it as on-the-job training.
If you’ve established a checking account for your teen, now is the time to make sure they understand how to budget. As discussed in this article, Richard E. Martinez, Jr., president and CEO of Young Americans Bank, suggests requiring your children to balance their checking accounts by hand.
There is a good chance that either you don’t know how to balance a checkbook or haven’t done it in years, but Martinez says this skill is crucially important because it teaches kids to think beyond today’s balance.
In today’s digital world where money can seem like fairy dust, a written ledger can make the flow of deposits and debits seem more real.
A word about credit
Teaching your kids about the basics of credit is important, including how to maintain a good credit score as they enter adulthood. Having said that, there are limited ways for them to interact with it in a real way as teens, unless you play the bank when they want to finance, say, a new iPhone.
In reality, the first time your child will interact with credit is later in life, as a young adult. While laws like the Card Act have made it harder for banks and credit card companies to target young adults with credit card offers, it has created a problem for some young adults as they look to buy their first car or other major purchases and have no credit file.
Startup firm Deserve is trying to solve that issue by relying on more than just FICO scores to judge customers. It is looking at other factors like your education, future employability and projected earnings to determine creditworthiness.
“It’s never too early to build credit history, says Kalpesh Kapadia, CEO and founder of Deserve. “Look for a credit card that has no deposit or annual fees, have a low APR and gives you rewards and benefits that matter to you.”
Kapadia also says to make sure you stay within your credit limit and always pay your card on time.
The education part never really stops.