It’s Dad’s Day. It’s a time when children share what they like best about their Dads. Ask a few kids and they’ll probably say that he is wise, strong, patient, hardworking, and good at solving problems. From a child’s perspective, Dad is often a superhero at the breakfast table who can do just about anything to keep everyone safe and happy.
But there is one area where some Dads may be falling down on their superhero status. This is in the area of making sure their kids know how money works. In a recent investor education survey, when asked 5 basic financial literacy questions, only 14% of respondents got all 5 correct, whereas 39% were able to answer at least 4 questions correctly. Almost 50% did not get a passing grade. If this is the level of financial know-how among adults, how can we possibly model good money behavior to our kids?
Sending them to school to learn the financial facts of life is not the answer. The number of School Boards with required financial literacy programs in high school is low. Unfortunately, until such standards become more prevalent, teaching kids how to stand tall financially is largely up to parents.
So how can Dads bulk up their superpowers in the financial literacy department? First is to get literate themselves, if necessary, taking a class or online course on financial basics. But once they’ve mastered the fundamentals, it’s time to communicate and demonstrate these lessons to their kids. Here are a few ideas for helping your kids become more financially savvy.
Lesson One: Money is not just for spending
Kids first see money as having one function only: as the means to get stuff now. Give a young child $5 and he’ll want to spend it all, often looking for things that cost $5. To get kids to consider other uses of money (such as saving and giving) get them to divide their funds into three jars for spending, saving, and giving, and talk about ideas for each. To make the rewards of saving more concrete, consider adding a small match to the funds saved.
Lesson Two: Your credit limit is not money in the bank
Don’t wait till your child gets her first credit card to teach her the prudent use of credit. Young kids may conclude that plastic is the same as cash by watching how their parents use their cards. Try to get the message across that cards are for convenience only and aren’t a source of additional money. Emphasize that when you pay with a card, you must have money available elsewhere to pay for the purchase. Use the three money jars to illustrate how funds must be taken out to cover the card transaction.
Lesson Three: Money does not grow on trees
Money may not grow on trees, but it can grow when it is invested. As your child gets older, you might introduce the idea that the money in the savings jar can be used to make more money by putting it into an interest-bearing account or into mutual funds or stocks. Explain that giving it to a financial institution is safer – your child can get his money back in full with some extra money called interest – whereas investing in mutual fund or shares may pay much more over time but getting your money back is not guaranteed. Talk about how it’s possible to own a “piece” of businesses either by buying the company’s shares or by finding a mutual fund that holds them.
Lesson Four: There are two sides to every financial decision
Children tend to think about financial decisions unilaterally (e.g. choosing an item of lower cost without regard to quality, or thinking that an investment with a high rate of return is better than one returning less) Help your child think through financial decisions by discussing the costs and benefits of their choices. Share with them how you made important financial decisions in your life. This can be very effective training to help them resist the lure of imprudent or hasty financial choices later in life, such as resorting to pay-day loans or get-rich-quick schemes.
Lesson Five: Money management can be fun
Turn a family event into a money management project that your kids can participate in. Planning a vacation? Give your middle or high schoolers responsibility for planning and budgeting for one aspect of the vacation (such as family lunches or an evening’s entertainment) and as a family discuss these choices and the financial implications of each.
Finally, if you work with a Financial Life Planner, ask him or her to speak to your child about smart money choices. This can be particularly valuable for kids just about to go to university or college, where they may be handling money and credit cards for the first time on their own.
On Father’s Day, enjoy it, sitting back in your recliner imagining the day when your kids will tell their own children “Thanks to my Dad, I grew up understanding how money works.” Get them conceptually started on their Financial Life Plan at an early age. It’s part of Keeping Life Current for our younger generation.