MoneyRates.com Poll Shows Need for More Financial Education of Children

In a recent poll by MoneyRates.com and GetRichSlowly.org, 65% of respondents reported that the financial instruction they received as children was lacking to some degree. Nearly half (47%) of all respondents reported receiving substantially no preparation from their parents for financial independence.

Does this lack of financial education explain the chronic debt problems that plague both American individuals and the government? Put it this way--ignorance certainly doesn't help. Helping children understand and manage money will give them tools to help them manage the rest of their lives.

Whether you're part of the group that received a solid foundation from your parents or came by financial lessons on your own, you can teach your children how to be responsible with money. As soon as a child is old enough to earn an allowance, he or she is able to soak up lessons about how to think about and handle money. Financial lessons can grow in complexity as your child transitions into adolescence and prepares for adulthood.

What are ways you can go about this? In general terms, there are two categories of financial lessons you should give to your children: financial literacy and financial responsibility.

Financial Literacy

Financial literacy is the ability to understand fundamental topics about how money works. These topics are important to helping a person know how to live within their means, plan ahead, and protect their savings. Some examples:

• The relationship between work and money. Money is just an abstract concept until it is related to the amount of time and effort it takes to earn the money to afford a basic item. This lesson is easily taught by having children do chores to earn their money.
• The tradeoff between spending and saving. Children can learn to understand that while money is meant to be spent, sometimes it can do much more for them if it is spent later on rather than now.
• How banking and interest work. Use some simple examples to demonstrate how interest can amplify your savings or magnify the money you owe. Older children can grasp concepts of compound interest and the relationship between risk and return.
• Types of bank accounts. As children start to accumulate more savings than will fit in a piggy bank, open a bank account for them. This is an opportunity to teach them about the differences between checking and savings accounts. If your child is older, you can introduce concepts such as money market accounts and certificates of deposits.
• How to pay bills promptly. At some point, walk your child through a list of the bills you pay to provide the things they may take for granted--water, heat, telephone, etc.--and what your system is for paying those bills on time.
• Debt and its consequences. Borrowing money is a necessary part of most people's lives--most notably, for education and housing--but it is important to show how borrowing now means having less money available in the future. More advanced lessons can include how credit scores are calculated (and why they're important) and how to use a credit card responsibly.
• Inflation. You probably won't have to wait long before you can find real-life examples of how prices tend to rise over time.
• Planning ahead and budgeting. This lesson can start as simply as saving up allowance money for a coveted toy, but in later years should progress to demonstrating how to use computer tools to account for different variables years in advance.

Financial Responsibility

Financial responsibility is the practice of being aware of your monetary situation and managing that money to make sure all obligations are met. In a way, financial responsibility is harder to teach than financial literacy--these are not single lessons but rather values accrued over time. The best way to impart these lessons is to live by example:

• Living within your means
• Paying your debts
• Balancing the present with the future

Educating children about money does not have to be a chore. It can be a channel of communication that makes an early connection and continues throughout the rest of your life.

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