Parents are responsible for teaching their kids a lot, and financial literacy has a place on that long list. But financial topics can be tough to explain, even to adult children.

However, there are plenty of learning opportunities peppered throughout your child’s formative years to teach good financial habits.

The basics, like soliciting their help to stay within budget at the grocery store, are a great starting point. But how do you cover more complicated concepts like interest rates, debt, and saving for retirement? It may actually be easier than you think.

Give them a loan.

Whether it’s learning to manage debt or the revelation of how interest works, having a small, manageable loan from the bank of mom or dad can be a great learning tool. Your child can experience interest on a small scale — before it becomes the average 16.45%1 credit card interest rate on a big balance. Talk with them upfront about charging a reasonable interest rate and then show them on paper how much they’ll owe if they make minimum payments versus paying off the loan more quickly. You can talk through the pros and cons of taking the loan to make a purchase now versus spending more time saving. This eye-opening experience has the potential to positively influence future financial decisions.

Match their investments.

In Beth Kobliner’s book, Make Your Kid a Money Genius (Even If You’re Not),2 she outlines setting up a matching program to teach children about the importance of investing in a 401(k) and capitalizing on the employer match — something many adults are not doing. If your child has a savings account or even a piggy bank, consider pitching in 25-50 cents for every dollar they contribute. (But make sure it’s financially manageable for you!) Familiarizing your child with the advantages of the “parent match” will mean that when they land their first job with a benefits package, the employer match won’t be a foreign concept. Kobliner also notes that the match incentive encourages saving.

Show the value of long-term saving.

Retirement can feel far away, which makes it easy to focus on competing priorities. For children (and many adults), the temptation of immediate gratification can be hard to fight, but you can help instill good financial habits by helping your child identify a financial goal then save for it. For example, if they want to go on a trip with friends over the summer, you can work with them to set up a budget outlining the trip’s cost and develop a savings plan at the start of the school year. This will help them conceptualize budgeting, estimate future costs and needs (just like they’ll need to do when planning for retirement), and experience the delayed gratification of saving for a long-term goal.

Importantly, children learn from you, so leading by example is another good practice. Need to improve your financial habits before broaching the topic with children? Set up a meeting with a financial advisor in your area.

 

1 Current Credit Card Interest Rates. Bankrate.com Retrieved February 24, 2017, from http://www.bankrate.com/finance/credit-cards/current-interest-rates.aspx.
2 Make Your Kid a Money Genius (Even If You’re Not), Kobliner, Beth. Simon & Schuster, New York, 2017.
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