What is the best way to explain how money is earned to a 3-year old? When is your child old enough to learn about credit card overdrafts? How to teach financial literacy to kids without getting them bored to death? This article will guide you through all the tracks and trails of learning about money in a fun and easy way.
3–5 years: the basics
What we learn: money can be earned, saved, spent and given.
It’s easy to explain earning by paying and allowance. You may consider rewarding your child for doing house chores, doing something healthy (or not doing anything unhealthy), etc. It is vital to set strict conditions that he/she must meet in order to receive the full payment. For example, you may pay 1 £ a week for not missing any of the sports training.
Saving goes hand in hand with saving jars and wish lists. Help your little ones to divide the earned amount into savings and spendings, and don’t miss the pleasure to recount the savings weekly. It’s not just fun, but also develops mental math skills and setting goals.
Spending is, for most, the best part of the whole thing. There’s so much room for learning! Mistakes and impulsive purchases are a part of it. Don’t blame your children for them, but encourage them to make their own decisions and face the consequences.
Giving to charity is a good habit. Your child will learn that there are people and animals in need, and that he/she is REALLY able to help. Giving 10% of the allowance to charity is the usual starting point.
6–10 years: how money works
What we learn: the differences between needs and wants, goods and services, short-term and long-term goals
You need to buy food for dinner, but you want to eat an icecream. A good idea might be to send your child to groceries: give him/her a shopping list with the needs and some extra money for wants. You may also explain that different people have different needs: for example, a big family needs a big car, and a big car needs much gasoline.
It is easy to explain goods and services by going to a shopping center or an amusement park: a popcorn and cola combo is a good, while a rollercoaster drive is a service.
Long-term planning goes hand in hand with saving jars. One might think that saving jars have more functions than some banking services.
Comment from the Dzing team: “We love books, and books about money are our favorites. Our top of the list is “Rich Kid Smart Kid” by R. Kiyosaki and “Kira And A Dog Named Money” by Bodo Schäfer, that is not yet released in paper version in English, but stands first on our wishlist”.
11–13 years: bank products and security
What we learn: how to use credit cards, what is debt, how interests are counted, how to make safe purchases
To learn about credit and debt, consider creating a credit card for your child. The main lesson would then be: “Take only as much credit as you can pay by the end of the month”. The next level of this would be taking the missing money from your child’s next allowance with an interest, if he/she exceeds the budget.
The second lesson about interest is: money grows in value over time. Consider giving extra interest on your child’s savings, and do it on regular basis to explain how compound percent works.
Budgeting is another thing that can be fun (well, if you don’t make it dead boring yourself). If you don’t have an own budget spreadsheet where you keep track of your incomes and spendings, that’s just the perfect moment to create it. You may make a game out of it: compete how much each family member has saved up by the end of the month, who’s had the most impulsive purchases and who’s the wisest spender.
This age is also a good one for switching to digital money. The Dzing app will help you here: creating an account requires just a few clicks. Draw your child’s attention to security issues: set up security passes and two-factor verification for all accounts, email and mobile phone. Explain how identity theft works and what consequences it has.
13–15 years: how to become rich
What we learn: how to earn, save and invest
The time for the first part-time job has come! Be sure to check that it is safe. You may consider remote freelance tasks as the first challenge or stick to the classics like babysitting and mowing the lanes for neighbours.
Let your child learn more about wallets and banks: join forces to make a research and find the best solution with the highest interest rate on savings, cashback and other little pleasures.
When your teen shows more interest in money, you can explain how bonds and stocks work. To make it simple, say that bonds are a safe option with minor profit, while stocks are more risky, but more rewarding. Let your child buy some bonds or stocks from your own account, if you feel comfortable about that. If your kid does it with his/her pocket money, make sure that you keep the bonds until he/she wants to sell them.
16–18 years: the real life takes off
What we learn: how to pay taxes, how to get a great credit score and when do you actually need a credit
Student loans, car payments and mortgages: the holy three of the world of credits. Some day your child will definitely take at least one of the three. Take it easy: make no stress out of debts and explain how to find the best conditions for a loan. Make sure that your child can match the wants, needs and cans. For example, a car must not be a new red Ferrari, a used VW is absolutely okay.
Warn your child to avoid payday loans by any means.
Another lifetime skill that one should develop before leaving the parents’ home is to always have a certain sum saved for unforeseen expenses, such as medical help, emergencies, car and home maintenance, etc. You may suggest creating a separate wallet or saving account for that.
Puh, getting adult can be challenging: here come the taxes. If your child has a part-time job, he/she must already know how they work. Still, offering help with filing taxes might be a good idea. If your kid has some issues in understanding how it works, suggest watching video lessons or using special mobile apps. They are really helpful.
Last but not least, take the time to talk with your teen about credit scores. Generally, these are the five things that are evaluated:
- Payment history
- Amounts of debt
- Length of credit history
- New credit
- A mix of credit card and loan debt
It’s okay if your child has a low credit score. How can a teen have a high one, with zero traction? But make sure he/she understands how the score is counted. The main idea is that with a high credit score, people get the lowest interest rates for loans.
18+ years: the new star is born?
Financial literacy is key to starting an own business, according to Warren Buffet. If your children feel confident with money, they won’t be afraid of starting an own venture when they grow older. Who knows who is the new Richard Branson here?