Personal finance is a topic that affects everyone’s lives daily, in major and minor ways. And yet, schools are barely teaching kids about money in meaningful, real-world ways. This lack of early understanding can lead to a bumpy early adulthood. And since most schools are not teaching personal finance, much of the responsibility falls to parents. In many ways, this can actually be a benefit, as you have the opportunity to ensure that your children learn finance the right way. Since as we know, typical financial education tends to push Wall Street ideals.
If you’re a parent, here are some terms you can start teaching your children to help them be more financially literate. We’ve listed them with appropriate ages at which to bring up the topics, however, it’s not too late to start if you have older kids!
Important Concepts for Teaching Kids About Money
1. Saving(s): Age 4+
It’s no secret that we love savings! And fortunately, this is one of the foundational concepts to teach your children. In fact, this is something they can really grasp around the age of 4. Not to mention, those who embrace saving early can have huge positive outcomes! This is a great way to prime your kids for financial responsibility and start teaching kids about money.
There are lots of great ways to teach your child about saving money. When introducing the concept, for example, you may want to use something more exciting to a young kid. For example, you can use candy or some other treat to teach good savings habits. Every day for a week, give your child two pieces of candy and have them save one piece into a special place you identify together. Then at the end of the week, show them how much they’ve saved up for later. With older kids, you might implement chores with a small allowance, so your kids can learn to save money for things they want.
2. Loan: Age 8+
By age 8, many kids understand the concept of a loan. Chances are, they’ve shared a toy or a treat with a friend, and either expected to receive it back or something of equal value. A loan simply involves some interest.
At this age, teaching kids about loans can be pretty straightforward. You can explain to them that sometimes people take loans for big purchases so that they can pay in smaller chunks of money over time. Give them examples of things that cost a lot of money, like houses and cars, and how paying for these things over time can help people get things they want right away. If you’re operating a family banking system, which we model in Perpetual Wealth, then you may even want to share the possibility of your child taking their own loan.
Another discussion point to drive home is the advantages of a loan over using your savings. For example, if your kid really wants a new bike, you can talk them through how to finance it. Depending on the price of their bike and how well they save money, they may choose to either tap into their savings or choose a loan from the bank of mom and dad. If you’re implementing a family banking system with whole life insurance, this can be a way to introduce your child to loan payments. No matter what, remember to stress that it’s important to make payments responsibly.
3. Opportunity Cost: Age 8+
When it comes to teaching kids about money, opportunity cost is perhaps one of the most neglected principles. Opportunity cost is the cost of making one financial decision over another. For example, if your child decided to buy the $500 bike with their savings, that’s $500 they can’t spend on something else. That’s also $500 they have to recoup in savings, that they’re not earning interest on, so there’s a compounding effect.
The beauty of whole life insurance is that you can use a policy loan to make a purchase now, without liquidating your savings. This means you continue to earn compounding interest. The idea of opportunity cost can help your child weigh their financing options at any age, and make choices that better align with their current financial situation. Having a family banking system can give them access to both cash financing and policy loan financing, and prepare them for the future.
4. Debt: Age 8+
When you explain loans and opportunity costs, it also makes sense to also talk about debt. While the typical stance on debt is that it’s “all bad,” there’s actually a little more nuance at play. Like loans, debt is money that you must pay back to someone. At this age, what you want to convey to your kids is that debt doesn’t go away until it’s paid off. You can help express this idea by being transparent about your mortgage; you may even want to show your kids your mortgage statement. Convey that this is something you pay every single month, and will continue to pay until it’s gone.
This type of transparency helps kids wrap their heads around what it means to be responsible for debt. It can also help them better understand what your responsibilities are as the parent. We think the more transparent people can be about their finances with their children, the more prepared those children will be to take their own financial responsibility.
5. Interest: Age 8-10
If you haven’t already opened a savings account for your kids, this is a wonderful age to do so. This can help them learn about interest by earning it with the bank! If you’d rather them wait, you can illustrate the concept by either taking a loan from your children’s piggy bank or offering them a loan from yours. This could be as simple as a $20 transaction, where you (or your child) pay the loan back in a week with $2 of interest.
Another way to illustrate the point is to show kids your whole life insurance statements. Show them how much money you’ve paid in premiums, and how much your cash value has grown. You can also show them how you pay interest on policy loans, mortgages, or your car payment.
6. Credit/Credit Cards: Age 8-10
While your kids won’t have credit cards at this age, you can introduce the concept to them. Because if you’re a parent, you’ve probably been to the store with your kids when they just HAVE to have something… and they forgot to bring their own money. A good way to teach a lesson about credit is to offer to finance their purchase so long as they pay it back right away, otherwise, they’ll owe interest. This can help them learn about credit early on. Below is one way you might explain the concept (ideally before you run into this shopping scenario).
Like a loan, credit lets you finance something without having to pay for it right away. It’s different from a loan because you typically have access to “revolving” credit, or money that you can access again once you pay it back. Another way they differ from loans is that a loan typically has a built-in timeframe to repay, with interest applied over that timeframe. When you use credit, you can avoid any interest charges by paying your balance immediately. Then interest is continually applied to your balance the longer you take to pay it off.
Be sure to explain the difference between a debit card and a credit card, too. You can explain that the debit card sucks the money straight from your bank account, while the credit card sucks it from the credit card company, so you have to pay them back.
7. Taxes: Age 10-12
At this point in your kids life, they’ve probably heard of taxes thanks to the revolutionary war. However, your kids may not fully understand WHAT taxes are. You can start by explaining them as money the government takes to pay for public programs like schools and roadwork. Taxes are a percentage of your income and can go up if you make more money.
If you want to teach a practical application in your household, you can apply taxes to your children’s allowance. Then you can put that money into a “fund” that goes toward expenses for the family. The key is to do this with transparency, so your children know their allowance is being taxed and contributing to family expenses. If your children ask, you want to be able to tell them what their “tax dollars” are paying for. Maybe they aid in the family vacation, a new “facility” in the home, or up-keeping a current facility, like the pool.
This is also a great time to share tax incentives with your older children, so they know that it’s also possible to lower taxes. If you want to implement this in your household, you can create your own list of incentives that you’re willing to give tax breaks for. You can get super creative with these tax breaks in a way that furthers your family values. For example, if part of your family mission statement is to “give forward,” you can implement tax credits when your child volunteers for a good cause. (Bonus: if you want some adult tax breaks, check out our good friend Tom Wheelwright’s new book: The Win-Win Wealth Strategy.)
8. Investment: Age 10-12
When teaching your kids about money, investments will likely come up at some point. You can explain an investment as something you pay money into, that you believe will earn you more money (cash flow) later. This can be a good time to talk about different types of investments. We are fans of real estate and private loans. You can remind your kids of their lesson on loans and interest, and express that when people make loans, they’re making an investment because they believe they’ll earn money on the interest charges. That’s why banks and other institutions have requirements for lenders because they want to be sure their investment works out.
If your kids loan each other money, they’re making an investment. However, it’s also important to teach kids that sometimes investments don’t work out, because there’s risk involved. Sometimes, you might lose money, or simply break even. This is why we love whole life insurance, instead of the stock market: it’s slow and steady, yet it’s also CERTAIN.
9. Credit Score: Age 15+
You may or may not be thinking of giving your kids credit cards when they are teens. However, it’s not a bad time to share what a credit score is. That’s because many teens aren’t taught about credit cards and credit scores when they’re kids. Then, once they’re 18 and in college, they get all kinds of pre-approvals from credit card companies. If they don’t know what a credit score is, or how to manage it, they can start on the wrong foot.
To explain it simply: there are 3 credit bureaus that track how you use your money so that they can score you. This score shows other companies and lenders whether you’re responsible with your debt. If you are, your score can open doors and opportunities for you. If you’re not, and you have a low score, it can bar you from opportunities like getting a mortgage. It takes a lot of time and dedication to improve your score.
If you want to prove that you’re responsible, you’ve got to make payments on time, keep your balances low, and manage your money effectively. Making your kids authorized users on your credit cards can help them build their credit scores early on. However, this also affects your credit score and your wallet if they aren’t responsible. Come up with a game plan and some ground rules together to have a smooth experience.
Additional Financial Education for Kids
All parents, on some level, want to raise responsible kids. Even more so, parents want their children to do well with money and lead a good life. The principles above are ideas that can help you in teaching your kids about money so that they have a good head for money as they grow up. And while there are many things we love about whole life insurance, one of our favorite things is that you can use it to create a family bank! With the family bank, your kids can learn what it’s like to save and use money responsibly. The family bank can empower kids to save for and finance the things that they want.
You can learn more about family financing in Kim Butler’s book, Perpetual Wealth. And now, you can get your hands on our new Perpetual Wealth Workbook! This workbook is designed to help you teach your children about family financing and other important financial concepts, and is a companion to the Perpetual Wealth book. You can get your copies today, and help impart financial wisdom to your family now and for generations to come.