Financial Words Parents Should Teach Their Children

Cute little girl is playing with paper money - dollars, isolated over white

Savings: Age 4+
Saving is one of the best topics to introduce at a young age. It’s easy for kids to grasp and can have a huge impact on those who embrace it early. There are plenty of examples parents can use to illustrate, here’s one: Start by giving your child two small pieces of candy during the day. Let them eat one right away and save the other until after dinner. Then each day for a week, give them two pieces but have them save one in a special place. When the week is over, they’ll be excited to have a bag full of candy. Explain that saving money works the same way — when you regularly put a little bit aside, in time it will add up to something big.

Budget: Age 8
A budget is plan that you make to keep track of your money and where it is going. One great way that a lot of parents teach kids how to budget is with “give, save, spend jars.” Whenever the child earns money they divide it between the jars. The “save” jar is money that’s intended for a longer-term goal; money in the “spend” jar can be used any time for smaller purchases; the “give” jar is money that will go to a charity of their choosing. The give jar, in particular, is great for getting kids to think about helping others while allowing them the freedom to choose where to donate their money.

Loan: Age 8
A loan is something that is borrowed, often money, which has to be paid back with interest. Most kids get the basic concept of a loan because chances are, at one time or another, they’ve lent something to a friend or sibling and expected to get it back.

Start by explaining some of the reasons people take out loans. For instance, because it costs a lot of money to buy a house most people borrow money (take out a mortgage) to pay for it. Even kids know that $300,000 is a lot of money, so when they hear that’s the average price of a house they can understand why most people borrow money to cover it. Car loans and student loans are also good ones to discuss.

While taking out a loan isn’t a bad thing, parents need to stress that when you do take on a loan, it’s your responsibility to pay it back.

Debt: Age 8
Loans and debt can be explained together. Like a loan, a debt is money that you owe someone that needs to be paid back. Once again, a mortgage can be a good way to illustrate how debt works.

Interest: Age 8-10
Interest has two sides: it’s either something you pay when someone lends you money or something that you earn when you lend money to someone else. You could explain interest to your child by telling them they could earn interest if, for example, “your sister runs out of her allowance but needs money this weekend. You could lend her $20 but charge her $2 in interest, which she will have to pay you back next week.”  You can also make it into a game to illustrate how it works: Ask to borrow a few dollars from your child’s piggy bank and then set up a schedule to pay it back over the next month with interest.

Explain to older kids how you pay a financial institution interest on a car loan or mortgage each month. Also point out that the financial institution pays interest on deposits you keep in your accounts there.

When kids are older and can calculate simple percentages, have them do some math to see how interest adds up. Show them a credit card agreement that charges 15% interest and have them figure out how much extra money you would have to pay to carry a balance of $5,000 or $10,000 on your credit card, versus if you paid it off right away.

Credit Card: Age 8-10
Credit lets you buy something without having to pay for it right away. For example, if you use a credit card to buy a new bike that costs $200, the money doesn’t come out of your bank account. Instead the credit card company pays for the bike. Then they send you a bill and you have to pay them back the $200. If you don’t pay them back right away, they will charge you extra money (interest).  The longer it takes you to pay back, the more money you will owe in the end. While credit cards are necessary to have — kids need to understand that they should only be used to buy things that they can afford to pay off right away.

Parents should also explain how a debit card is different as it takes money directly from your checking account. When you’re at the store and you slide the debit card, explain that the card is taking the money right out of your account at that very moment.

Taxes: Age 10-12
Chances are most kids know the word but few understand what taxes are. Here’s the explanation: Taxes are payments that go to the government for the work that it does, such as improving schools and fixing roads. They’re taken right from your paycheck and the amount you pay depends on how much money you make.

You can also explain to older kids that doing certain things, which have a positive impact such as donating money to charity or installing solar panels on your house, can lower your taxes.

Investment: Age 10-12
An investment is something that you spend money on, which you believe will earn you even more money (a profit) down the line. Kids should know, however, that although people invest in things that they hope will make them more money, it doesn’t always happen that way. That’s why it’s never a good idea to put all of your money in a risky investment, because if you do and the investment fails, you could loose it all.

Stock: Age 12+
A stock is a piece of a company. When you own stock in a company, you own a small piece of its business. Every stock has a price and that price can go up or down, depending on what’s happening at the company.

Stock movements are best illustrated to kids with an example of a company they know. For instance, say you bought one share of Apple AAPL -0.16% stock for $5 . If the company sold a ton of iPhones, which is good for the company, it could make the stock price go up to $8, meaning you would have earned $3 on your investment. On the other hand, if Apple didn’t sell a lot of iPhones and the stock fell to $2, you would have lost $3. Most people don’t own a single piece of a stock (a share) – but tens, hundreds or thousands of shares. And most people also own stock in several different companies. The “stock market” is where people buy and sell (trade) their stocks. There is an actual place where stocks are traded but it can also be done over the Internet.

Learning about stocks can be particularly fun as kids get older. There are a lot of online games and apps they can use to create virtual stock portfolios, which can show them how stock prices move and how much money they would have made or lost if they been dealing with real money.

401(K): 14+
As kids enter the teenage years, it’s a good time to begin preparing them for some of the things they will likely encounter once they enter the workforce, one of which is a 401(k) plan. A 401(k) is a savings account for retirement offered by your employer. The money that you put into a 401(k) is taken out directly from your paycheck, and is intended solely for retirement. You can’t withdraw it until age 59½.

The money that’s put into a 401(k) gets put into different investments. The ideas is that the investments will increase over time, so the money in the 401(k) will grow as well.

Credit Score: Age 15+
Once you plan to give your child use of a credit card, you must explain what a credit score is. Here’s how to explain it: There are three credit bureaus, which calculate your “credit score” or how you use your money. The goal is to have a high credit score. The way to receive a high score  is to have a long history of paying your bills on time. When you don’t pay your bills on time or you have too much debt, your score gets lowered.

It’s important to emphasize that a good credit score will help in the future if you want to borrow money to buy a house or a car. Meanwhile a bad credit score can make it difficult for you to borrow money.

Article Source: Jennifer Ryan Woods for http://www.cuinsight.com/11-financial-words-all-parents-should-teach-their-kids.html 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s