“A very rich person should leave his kids enough to do anything, but not enough to do nothing.” – Warren Buffett
Here lately, I have been thinking more and more about the need for financial education curriculum in public schools. I am constantly amazed by the number of young people (and young adults) I interact with that have no basic understanding of how finances work. I mean a very elementary understanding – like how to balance a checkbook, how to compute interest, or what a mutual fund is.
After watching story after story from this latest recession, it is clear to me that our national personal finance IQ is too low. Perhaps if we raised more financially savvy generations we could avoid many of the same mistakes.
What Age to Start Teaching Basic Finance?
I like the idea of teaching kids about money when they are fairly young – like eight years old or so. By this time, many kids are receiving allowances, or receiving money for birthday presents. This makes money lessons a little less abstract – they can actually touch, and spend, their own money.
If we start at seven or eight years-old, that means plenty of very basic financial concepts could be well-covered over the next ten years. We could teach kids the value of saving money. We could teach kids the dangers of taking on too much debt. We could teach kids the power of compounding interest to foster and early interest in investing their money.
Will every child “get it” and become a future Warren Buffett? Of course not. Just like every kids doesn’t fully grasp chemistry and become a research scientist. But for the general student population, a general course each year in personal finance could go a long way towards creating a more financially-savvy young adult population.
Isn’t It Up To Parents to Teach Kids About Money?
Yes, it is. I believe it is up to parents to teach their kids most of life’s lessons. However, teachers can supplement that learning, and in cases where parents are unable or unwilling to participate, teachers may provide the only education source for children. It is a sad reality that the latter scenario plays out far more often than the former. Lack of parental involvement makes teachers jobs much more difficult. This is especially true in “real world” subjects such as personal finance.
How Can Parents Teach Kids About Money?
Besides modeling responsible spending habits for your children, there are a few things we can do to help kids learn financial concepts outside of a classroom setting.
Take your kids grocery shopping. Rather than having kids passively follow along while you do all the shopping, encourage them to help with your math tasks. Teach them how to calculate the unit price and compare two items for the best value. Weigh your produce and let them estimate the total cost by multiplying the weight by the cost per ounce/pound. Let them keep a running total of your bill on the back of your grocery list (for bonus points, older kids can even calculate the sales tax for a total bill).
Take your kids to the bank. My grandfather was in his 70s before he first used an ATM, and I don’t think he has ever used a drive-thru window at the bank. He believes in “eye balling” people when doing banking business. So growing up, I knew my way around the bank after tagging along with him. I watched him cash a check for cash (he called this “walking around money”). We rolled coins and deposited them into my grandparent’s account. Of course I loved it, because I always got a lollipop from the teller. Little did I know I was actually learning about how banking works, something I now hope to pass along to my own kids.
Give kids a four-quarter budget lesson. It’s a simple exercise, but helps kids understand that money is finite. If only Congress understood this! I digress.
The link above explains the exercise in detail, but basically you give your child four quarters representing major categories of your budget (taxes, mortgage, transportation, everything else). Ask for a quarter back to pay taxes on your income, another to pay for your home, and another for your car, auto insurance, gas and maintenance. Then explain with that last quarter you have to put some in savings, some towards food, lights, water and most of the rest towards bills. With that last little fraction of a quarter of your budget you can spend on toys and fun stuff.
Let kids pay the power bill. No, not out of their allowance! Let your child sit down a couple months and write out the check for the power bill. Show them the bill and explain the various lines. This is how much electricity we used every day. This is how much it costs us to run the television, lights, air conditioner, etc. This should also help them understand why you constantly go through the house behind them turning off lights and the television (I’m not the only one doing this, right?).
Buy kids a share of stock, and let them pick the company. If they like Disney movies, buy a share of Disney. If they like chewing gum, give Wrigley’s a look. And who doesn’t like McDonalds (which is actually a pretty good dividend play, too!). Show them how to look up the stock quote in the newspaper, or online. Consider adding a second share in a completely different industry – a great introduction to diversification.
What are you doing to teach your kids about money? I always enjoy learning new teaching methods, games, etc, so please share.
*This article appeared as an Editor’s Pick in the Carnival of Personal Finance: Famous People With Tax Troubles Edition
This is such a great post. Kids do need to learn about money at an early age. One of the most important lessons is that if they don’t have enough to buy a certain item, they can’t buy it until tthey have saved more. This is one of the things I am helping my daughter learn. (It has also helped her a bit with math!)
The stock thing is a good idea also – although it may be hard to buy 1 share of something.
Great tips – I wish my parents had started me out learned about investing…I’m still a bit frightenend of it!
I don’t have kids yet, but as a kid myself, I had my own “checking account” with my parents. My allowance was a “deposit” in the checking ledger, and if I wanted to buy something (that my parents would actually pay for), I deducted it as a withdrawal from the checking ledger and wrote them a faux check (that my mom made). It was a great exercise to see how money works in the real world, as most of us don’t get cash as paychecks and to pay bills!
There is a terrific episode of “Leave it to Beaver” where Beaver’s dad gives the kids some money to invest in the stock market. Eddie Haskell comes along and talks them into investing in some rocket ship stock that flies high but then tanks, all the while Ward is telling the boys to invest in a safer stock — they learn their lesson pretty quickly. My kids enjoyed this episode and it got them thinking about investing strategies!
I think this article makes sense. This is really a big deal nowadays. Kids should be taught on how to handle money as early as now.
I’ve had mykids involved with investments at an pretty early age, in one form or another… but I really haven’t involved them with the balancing the check book or the check writing aspect of personal finance. After reading this, I now see where that makes sense though.
Thanks for the great tips!
You know it’s funny, I’ve been saying this for quite some time, in fact when I reviewed “the Wealthy Barber” book (I’m Canadian) – I wrote that
” I also believe that all Canadian students should have personal finance taught to them in high school, and this book would be a very good ‘text’”
It would make an absolutely perfect ‘class’, and I must say that for life-long lessons, it would make a much bigger impact than say.. hmm.. Geometry? (I still don’t use any of that info and if I did there’s a world of google out there!) ha ha.
Keep up the great posts FrugalDad, love the content here.
Len,
I certainly agree with you – to a point. The lessons we learn about money should be taught at home – AND at school. Getting taught in both places will help to reinforce the lesson.
My daughter is 8 and I have been surprised at the amount of homework she gets. I am always willing to help, as I am sure most good parents would. Sometimes I wonder though about the kids who aren’t so lucky – where mom or dad isn’t helping them to learn. This has a lot to do with why graduation rates are so low. Schools often get blamed for this, but parents have to share the blame as well.
I believe it would be very easy to get schools to make this part of the curriculum, however it won’t happen because of all the red tape and regulations by school districts.
I have a new book, due out shortly which focuses on helping families to get more from their 401(k) plans at work. There are very few books like this available which focus on the 401(k), which has become a primary source of savings for many people. The book is titled, “Help! My 401(k) Has Fallen – And Must Get Up!” and will be due out in May 2010.
I like the idea of setting up a “checking account” with the parents as Jena commented.
By the time my children get to the age where they will be on their own, I doubt we’ll see too much physical cash. Even now, the majority of transactions occur electronically. So, better to get them used to that from day one. Although, physically parting with a bill is a psychologically stronger tool.
Love that Warren Buffet quote, and those are some good ideas, especially for young kids. I’m not surprised about teens not knowing how to write checks though, at least in this area you rarely see anyone write a check at all. And balancing an account is something a whole lot of adults don’t know how to do either — or else they don’t care to do it if they do know how.
Good point on checks! Perhaps we should also teach kids how to work bill pay, since everything will be online by the time they start paying bills (I’m still not sure that’s a good thing – something about sitting down and writing out a check makes it hurt a little more).
Great article and I too like the idea of the faux checking account that Jena commented on. these are great ideas that I will use when I have kids. thanks!
I agree with teaching kids but… I think there will be a lot of silent resistance to rolling it out in schools. Our U.S. economy is based on people not making frugal choices.
Can you imagine the majority of Americans being frugal? How many product and service businesses would collapse or have huge layoffs? Layoffs would mean less spending and more layoffs , etc. Our current Recession which is a moderate dip in consumer spending which caused massive layoffs.
We no longer produce much in this country, we are mortally linked to consumerism. We need to ween ourselves off glutonous consumption at a national level but how do you do that without business-types in this country screaming bloody murder?
No, I don’t see it happening in public schools. It would likely be branded “indoctrination” and “anti-capitalism”
You are so right. Learning about finances MUST start in the home.
Alas, the problem is that not only are many parents clueless as to how to do this, but many more don’t know enough themselves—and are poor role models.
Kids model what they see. Some parents are good teachers but their teachings are contradicted by their own behavior. (You can’t tell kids to save when you don’t, for example.)
When you grow up with parents who do not know how to responsibly handle money, it is the rare person who escapes that without some major enlightenment, via their own challenges.
We’ve known people who came from families were money issues were a constant for kids. In some cases, it inspired them to start working while still in high school, to go for a college education, to get scholarships, so they could get a better job than parents and create a more stable life.
Then, when those same kids who worked hard, spent little, finally get to working as adults they go “wild” with money. It’s as if all those years of doing without finally hit them.
They never really learned anything except–”I have to make my own money”. Now, that served them for awhile, but it didn’t help in the long run, where many took years to unravel what really propelled them to overspend. (It’s really hard to overcome a life of poverty and deprivation that isn’t just about not having things, but also about not having love and emotional support from parents.)
Some kids come from poverty and create huge wealth. The majority do not. Some people come from comfortable middle class homes, or wealthy ones, and end up in debt.
There are so many factors involved in terms of motivation. it’s not really about money or finances. It’s understanding how you use money and what it means to your life, etc.
I personally don’t agree that this type of education has to be started or continued from home. It’s at school where we learn our ‘academics’, and I believe personal finance should be right there… mandatory.
All it takes is one good course to get kids excited about the realities of money management and saving. You’re not going to save everyone from a lifelong struggle of debt, just like you’re not going to create doctors out of everyone, but it’s a shame that even the smallest bit of education about it doesn’t get taught. Teach me about compound interest before you teach me about geography anyday.
Mom and Dad can concentrate on teaching me values, respect, and certainly the value of a dollar – but it doesn’t have to start at home.
We learned how to write checks and balance a checkbook in third grade. We also learned how to fill out an IRS 1040EZ tax form. Another lesson that has stuck with me was when we had to calculate how much you would have at the end of one month if you started with a penny and doubled it every day. So day 1 would be 1 cent, day 2 2 cents, day 3 4 cents, and so on for 31 days. Those pennies really add up! In real life it probably wouldn’t be quite as dramatic, but still.
Our youth would be much better off if they were taught like this. Sadly, too many people have mentioned that their parents didn’t know anything about finances either.
I’ve been looking into community programs geared towards personal finance and children…anybody know of any popular ones?
Wasn’t there supposed to be a subject called home economics in school where we learn this stuff? I know I never had this subject, or learned about personal finance in any subject in school.
I absolutely agree that schools should teach a curriculum on the basics of personal finance. But since that’s not being done, the next best thing it to have parents teach their kids about it while they’re young. This reinforces good habits as they grow into adults.
I don’t have kids, but your suggestions on how to teach kids about money sound helpful. I’d just add the need to instill a good work ethic in them by having them get a job while they’re young, or just making them earn money by doing household chores.
Thanks for the post. It definitely resonates with me.
First, I am a BIG, BIG fan of Frugal Dad!
Second, are you familar with Junior Achievement? If not, I recommend you check out http://www.ja.org. Junior Achievement (JA) offers programs for kids K-12, in work-readiness, entrepreneurship and FINANCIAL LITERACY.
Doesn’t sound warm and fuzzy, but, these progrms are life changing for young people. Just a few comments from freshmen high school students who have completed the JA Success Skill program:
“We don’t think we’re useless anymore.”
“I really appreciated how someone else cares about my future besides just me.”
“My family told me I’d nerver amount to anything, but no matter what, now I’m going to go to college.”
Keep up the GREAT work!
Great article. I totally agree that finances are best taught starting at home. They get a hands-on experience of the various aspects of money linked with grocery shopping, managing money, electricity / water bills — consumption.
And no its not only you — I too run around the house switching off lights, fans, television
Have linked to this post here:
http://www.theorangepaper.com/linkfest/weekly-roundup-20100412.html
This topic is a passion of mine as I have a 9 year old who of course wants EVERYTHING!
I have two younger siblings who are a mess financially and a 9 year old daughter who I committed to teach how to handle money.
The biggest challenge that I have had regarding teaching kids about money is that all of the teachings/support that I find completely focus on teaching them how to save, invest, donate and spend it.
Well, that isn’t actually interesting until they have money, is it?
So, I have taken a completely differnt tact with my daughter since about 4 years old.
Every year around her birthday we review all of the jobs required to support our household (cleaning, shopping, taking care of the pets etc.). We divide the responsibilities into hers and mine as part of our responsibility to support our household. However, since I have a set of jobs AND I have money I am willing to pay my daughter to do some of these jobs for me. We then negotiate the job, how we will know it is done and what I will pay for her to do my job for me. She gets to choose each week whether she does the job to earn the money or not. If she chooses not to do it and I do my own job then she loses the opportunity for that week.
I think that this is the absolue first step in teaching money. My daughter is learning to value her time verus having money, negotiate a job and associated pay and decide if it is worth it for her. She has gone through so many different phases with this – not interested because there is nothing that she want money to all the way through regretting that she didn’t do the jobs to earn the money because there is something that she now wants really badly and she doesn’t have the money for it.
Aren’t these types of experiences and decision making processes the very core of our adult money management/life style choices?
We even have the concept of “credit” at my house. My daughter may now borrow from me up to 1 week’s worth of money that she can clearly identify that she will earn and pay back to me. Once, she does this enough times, then I will be willing to extend to her 2 weeks credit.
I firmly believe that before we teach our childeren how to spend money, they need to learn how to make the decisions about how to earn money and how the proactive effort to earn the money versus not affects their spending decisions. Learning this now while the decisions are small is critical. Later, it could very well be the difference between being in debt or having money set aside for future needs/wants.
Your feedback on this approach would be appreciated!!!!
Meredith
I agree that learning about finance should begin early in the home. I would expand that to include: learning about everything should begin with the parents.
In my bus and subway travels around the city, I see parents who constantly interact with their children, reading to them, talking to them, discussing things with them. Stimulated and learning every minute, these are lucky kids. I also see parents who completely ignore their children and brush them off when the kids have a question.
Hopefully these kids will eventually learn on their own, but still, it’s a missed opportunity for both child and parent.
The State of Ohio just implemented a requirement for high school graduates to take a financial education course. They’re still working on the curriculum and the course will not be offered (at my son’s high school) until 2011-12 and will be required starting with the graduating class of 2014.
Personally, I plan to have my 14yo take one of Dave Ramsey’s Financial Peace University Courses before he graduates high school. We are trying to help him learn at home, but I want him to get sound financial teachings that we believe in from an outside source as well. Lends credence to your lecturing.
A big part of teaching kids is also allowing them to fail and make their mistakes with money. Our 14 receives an allowance and is expected to buy his clothes out of it. I’m waiting for him to spend too much on his electronics and not have enough for what he really needs. Failure gets too bad a rap in this society. Imagine if we were allowed to make them (and learn from them) when we’re young, how much better our kids w/be prepared for the real world.
Meredith
I totally applaud how you are raising your daughter, because you are not teaching her just how to manipulate numbers, but rather what’s behind financial decisions.
You are also linking actions and choices with outcomes.
The only comment I would make is that I hope that you do also require your daughter to help around the house WITHOUT paying her.
One of the downsides of paying kids to do work is that some get the idea that they must be paid to do anything in the house, which IMHO, should not be the case. A family requires help to maintain its home, etc. and all family members should contribute to that without “pay” per se. (Although frankly, every woman who runs a household, whether or not she works out of the house, should get a “salary/fee” to ensure that her spouse knows the real cost of her work…and to allow her to save for a time when she may be ousted. Not so romantic, but necessary. I think of women who have built and maintained homes that freed guys to do their jobs and succeed and who are then kicked out with nothing. But that’s another topic…)
Absolutely! She has a combination of household chores, as does my son, that are required to earn an allowance, and a set that are required as a loving contributor in our family. I explained that Dad doesn’t get paid to mow the lawn or wash the dishes after dinner. He does it because he loves his family and wants to help.
Oh yes! Thanks ever so much for your feedback.
My daughter has jobs around the house that she does without pay. She only gets paid for jobs that she does which are by definition established as my responsibility.
At our house we actually refer to these regular jobs to take care of the house, yard etc. as “appreciating the things that we have” because if we don’t show our appreciation by taking good care of them, then we can’t expect to have them anymore.
By the way, I have been a reader of frugaldad for some time and really appreciate the contribution that reading your work and the comments have made in my life. Thank you.
Meredith
Unfortunately, these at-home life lessons don’t always sink in. I had our son pay the bills weekly from our checking acct. The idea was to teach him about using a checking account and also to give him a handle on how much the basics he takes for granted (like the electricity and the water and the cable TV) actually cost. He got NOTHING out of it, nothing at all except that he hated yet another chore he had to do, and he ruined a lot of checks because he never got the hang of ripping them out correctly. I’d say he was about 12-15 during those years.
Just yesterday (he’s now 22), I ran into him at the grocery store and noticed he had MorningStar products in his cart, so I handed him a 75-cent coupon I had good for any MorningStar product. And the store would double it. He took it and said, “What’s this?” I explained. He said, “How do you get these?” I had always taken him along on shopping trips and had him calculate unit prices and help me track coupon usage, clip the coupons from the Sunday paper each weekend, etc. Oh well!
Hmmmm……interesting idea. I know Dave Ramsey suggests something similar with his “envelope” concept.
Take some envelopes and write a category on each one – Food, Clothing, Gas, Entertainment, etc. With your budget, put the cash needed into each envelope and use the money accordingly. For example, if you have $600 for Food for the month, whenever you buy food, it must come from that envelope. Once its gone, its gone. You can take money from another envelope if there is leftover money elsewhere, but you can’t spend what you don’t have.
One thing is for sure, I have talked with many people in the past year who have had to tighten the belt, and living frugally is much more acceptable than it was in recent times. By lowering expenses, and sticking to a budget, we can put more money into retirement savings, which we all need to do.
When I was in college, I took an education class from a professor who always had an energetic way of getting his point across. One of the many great lessons he shared with us was a powerful way to help your children understand the value of money and how it works within your own family.
He suggested that one month, instead of depositing your paycheck in your account, you cash the whole thing into $20 bills. (You may need to hire yourself some security for the evening. . .) Bring all that cash home and stack it on the living room floor. Sit your kids down on the floor (enjoy watching their eyes bug out) and explain that this is ALL the money your family has to buy things during the coming month. They will be very impressed with your piles of cash at this point!
Then bring out a poster board with the monthly family expenses listed in a large font. Have them count out the bills to “pay” the bills — mortgage, grocery bill, electricity, water, sewer, insurance, gasoline, car insurance, piano lessons, etc. They will watch those stacks of green backs disappear just like you do every month. When you’ve paid all the bills, let them count up how much money is left. This just might be the most sobering moment of their young lives, and will help them understand why the $80 tennis shoes or $150 jeans they want might not be in the best interest of the entire family.
If you are uncomfortable using real money, try using Monopoly money or cutting up green paper and writing $20 on each one. But, as you can imagine, it would be much more effective using the real thing.
That’s a great exercise! I might just try it myself – with the small exception of withdrawing the money from savings to match my take-home pay. All the same to the kids.
Great idea, I have 10 year old twins who had a class this year in school teaching them to budget their money. They are given weekly paychecks and have bills they need to pay. They usually have money leftover and then they are rewarded with some type of goodie bag to purchase with the leftover money. They unfortunately miss many concepts of how to save and plan for the future. I am going to do your exercise with them and see how they feel when bills pop up unexpectedly and have them get a sense of real cost.
Thanks for posting this comment , I look forward to seeing their bug eyes!
Excellent topic, and one that I have been giving some thought to.
My 6 year old has had some math exercises at school where she is shown pictures of different coin combinations, and she has to write the number that corresponds to the cents displayed in that combination. For example: a set of three nickels and 2 pennies – here, she would have to write 17.
This equates money to quantifiable, numerical units – and makes it more real, in a language that they are beginning to understand. They know at 6 years old that 3 plus 2 is greater than 3 plus 1, for example, so by extension they realize that 5 dollars are more than 4 dollars. When they go to a store, they can compare how one product costs more than another. For example: why does one toothpaste cost $3.99 and another cost $2.99? Why pay $1.00 more? When these questions are asked, as they understand math, it offers examples of how to make wise decisions when it comes to money.
To take it a step further, I link the savings to something she likes, such as a stuffed animal from Build-a-Bear (what a great business model, by the way). She can see how purchasing one toothpaste over another could save $1.00, and saving $12.00 through different purchasing decisions could allow for a nice new stuffed animal to be purchased.
Someday well in her future, the topic of time value of money will come up, and the power of compounding will be taught. For now, saving for stuffed animals is about right
Life is to enjoy, and childhood is such a precious time.
HI……..I think this is wounder full idea for kids good and would be a great exercise as well as we know while playing a game and kids learn alote and they can know about their saving stuff and when they will buy some thing they could work that out great i like this site good for kids carry on
Great article!!! I also checked out the “Four Quarter Lesson” – what a great object lesson. Totally gonna use that one!
I agree that it’s important to start early when you’re teaching your child about finances. My daughter will turn 3 in August. Is it too early to teach her the value of a dollar? I think not! A family friend gives her 6 gold dollars every week. That really adds up! My husband and I have our daughter put the money in a piggy bank. We also opened a savings account for this kid, and I took her to the bank where we gave the bank her money. She, too, gets “fun” money from her own money. I plan to take $10 or so from her bank and let her buy anything she wants. I think this process begins to teache her what money is all about, even though she’s little.
My daughter was in Girl Scouts during her junior high and high school years. There were several badges the older girls were able to earn during that time that focused on personal finances. Her junior high troop leader is a banker, so she personally taught a badge that was meant to help the girls understand how a checkbook works. I assume the badge lists have been updated since my daughter graduated in 2007 – but GS does like to keep a close connection to “here and now” issues. So if your girl is in scouting, look up the current specifications.
“Not Just Schools”
Well, i have the feeling that school don’t teach finance at all. It’s not about count your groceries bills.It’s about understanding how mortgages and insurance policies work, what is inflation, how taxes and duties influence our lifes…I can say most of the people (not kids!) have absolutely no idea. and that’s bad, very bad…
It’s great when there is a responsible teacher, as monroe mentioned, but I think this is an exception – in both USA and Canada (I don’t know about europe or Japan, but I guess it’s not much better…)
Lorne
This is a great article. I firmly believe that parents have the greater responsibility to teach their kids personal finance (both explicitly and by example). I think it’s even more important these days since schools don’t really teach personal finance. Most business schools don’t even teach personal finance.
My daughter was in Girl Scouts during her junior high and high school years. There were several badges the older girls were able to earn during that time that focused on personal finances. Her junior high troop leader is a banker, so she personally taught a badge that was meant to help the girls understand how a checkbook works. I assume the badge lists have been updated since my daughter graduated in 2007 – but GS does like to keep a close connection to “here and now” issues. So if your girl is in scouting, look up the current specifications.
I couldn’t agree more! The educational system totally fails in basic financial knowledge! By the time I graduated from college, I still had no idea what a credit score was (and I am highly educated, and a doctor now!)!! But I did have to take a million classes on race and racisms, women equality, blah blah blah. One of these classes should have been replaced by basic finances with emphasis on budging, investing, and retirement.
What a great article!
Another way to teach the children about credit in general is to help them buy an expensive toy. Ask they to pay it back in chores or part of their weekly allowance. They will quickly learn to discipline themselves and start paying their bills promptly.
Prakash Dheeriya, PhD
Father, Author & Professor of Finance
Finance for Kidz series
finance4kidz dot com
Great article. My mom actually took me to the bank and signed me up for a savings account when I was 5. I also receive an allowance of which I had to save 20% and donate 20%. It was a tremendous learning experience for me. Now, at age 27, I launching my own social enterprise aimed at using gaming to help kids to develop good financial habits.
I’d like to tell you more if you are interested.
—
Jason
jason@onezindagi.com
Hmm. So I’m not sure if my original comment went through, but I really liked your article. I learned at an early age – 5- to start saving money, and it had a huge impact on my life.
Twenty-two years later, I’m launching Zindagi, a social enterprise aimed at using gaming to help kids to develop good financial habits.
I’d like to tell you more if you are interested.
—
Jason
jason@onezindagi.com
This is an AWESOME Article!