A few months ago I learned some alarming facts about debt and money management.
According to NerdWallet’s 2017 American Household Credit Card Debt Study, the average American household with credit card debt has a balance of approximately $15,432.
Indebted households pay hundreds in interest each year, and many Americans use credit cards to cover medical expenses.
Nearly 1 in 10 of those earning more than six figures annually said they struggled to make ends meet.
My niece and nephew are 7 and 3 years old. I have a vested interest in learning as much as possible about personal finance and money management so that I can teach them not to make the same mistakes I made.
If you have children, here are some recommended guidelines for when and what you can teach about personal finance and money management, even when they’re as young as 3 years old!
Ages 3 to 5
Between the ages of 3 and 5, young children can learn the shapes, names, and values of different bills and coins. They can learn to count pennies, dimes, nickels, and quarters; they can learn how much each coin is worth.
To reinforce the idea of different “values” you can also have them sort the coins into different jars, and you can decorate each of these jars together.
At this age, you can also reinforce their understanding of impulse control, patience, and delayed gratification. (Easier said than done, right?! The struggle.)
If you have time, make crafts and toys with some of the household items you might normally throw away. This will help set the foundation for their understanding of recycling and waste, down the road.
Ages 6 to 10
Not all parents (or financial literacy professionals) agree on the suitability of giving allowance.
Those in favor disagree on exactly what it should be given for.
Chores? Schoolwork? Good deeds? Something else entirely?
Create jars for saving, spending, and donating. Have them divide their allowance or any other gifts into each of these jars. You can even set a recommended percentage for each jar.
Introduce the concepts of budgeting, saving, spending, donating, and volunteering. Introduce S.M.A.R.T. goal-setting.
Help them understand the difference between needs and wants.
You can also help them set specific savings goals, such as having them save their allowance now for something they hope to purchase some time later.
Take your child to the bank while you open a savings account for them. Explain how cash can also be used instead of credit or debit cards. (This is especially important today since much of our transactions are done online. It may be harder for them than it was for us to understand the connection to actual paper money).
Donate food, clothes, and shoes to an organization you support. Help them understand waste as well as greed.
Ages 11 to 14
Show them how to evaluate the best deals, comparison shop, and assess quality.
Let them make at least one household spending decision, such as having them purchase an important household item for the family. Each week, they’re responsible for saving their money to buy this one item for the house (such as laundry detergent).
You can also give them additional opportunities to earn money, and teach them about taxes and interest rates.
At this age, they can learn what it means to be a consumer and learn about consumerism.
They can research trends in marketing and advertising, and learn about investing in the stock market.
If they receive an allowance, they should start saving at least 20% of their income into their savings account. They should learn what it means to start your own business, and they should brainstorm transferable skills they have that could serve them well in entrepreneurship.
They should create and manage their own personal budget.
Ages 15 to 18
In high school and beyond, young adults should take more ownership over their personal finance and money management.
They should understand the difference between gross and net pay, and should be able to calculate taxes. They should be able to compare interest rates for any student loans, and should know the difference between subsidized and unsubsidized loans.
If they are employed, they should create an Emergency Savings Account and save 20% each pay period. They should also assess their own progress towards their SMART savings goals.
Youth and young adults should learn about building credit, credit reports, and maintaining good credit. They should learn about the dangers of misusing credit cards and the consequences of a low credit score.
Additionally, teach them or find resources where they can learn more about real estate, mortgages, and compound interest.
Ages 18 to 21
Young adults should start saving for retirement. They should be able to compare best rates for insurance: health insurance, life insurance, car insurance, etc. Understand the benefits of having a Roth IRA or 401K. They should also understand basic principles of trading and investing, even if they aren’t able to invest at this time.
Finally, they should understand how to purchase their own home, refinance loans, and manage their personal budget.