We have to become more financially literate. Seriously, not to be dramatic, but our financial future as well as Uncle Sam’s position in the international economic pecking order really do depend on it.
As parents, we haven’t exactly set the best example for our kids in recent years as far as responsible money management is concerned. We’ve spent ourselves into a recession, continued to rack up credit card debt throughout the recovery, and allowed our children to over-borrow for higher education to the point that we collectively owe more than $1 trillion to student loan providers.
As a result, it’s really no surprise that U.S. parents report the world’s second-lowest level of confidence in their kids’ money management skills — in front of only Bosnia, according to Visa’s Global Financial Literacy Barometer.
“The average person has about 20 percent of the financial literacy they need to be self-sustainable and believes that their ‘wants’ are really essential items,” Barbara Neuby, professor of personal finance at Kennesaw State University, recently told WalletHub. “People should educate themselves on banking and the global financial crisis because there is a crisis and it will hit the US very hard someday. We are getting closer to that day.”
The question is how to reverse course before then. How can U.S. adults impart upon our children the financial skillset and values needed to navigate the complex world of modern personal finance when our own record for doing so is shoddy at best?
You have to be grounded, not a genius
Financial literacy experts emphasize what’s known as “just-in-time learning.” That means you don’t need to memorize everything that was ever written about personal finance in order to make responsible decisions and ultimately attain financial security. Rather, you need to familiarize yourself with the bedrock principles of responsible money management and get as much practical experience as possible when the stakes are low.
The personal finance landscape is in a constant state of flux, after all, and any details that you pass on to your child in regards to, say, buying a home may no longer apply when it comes time for them to put the information to use.
What does that mean for parents? While it’s probably a good idea to brush up on your own financial knowledge in advance of teaching your kids, your core values and overall spending habits are what will ultimately resonate with them most.
Devising a personal finance curriculum
Teaching young people the tenets of responsible money management is far from an exact science. There are, however, a number of best practices that one can leverage while tailoring the learning process to their child’s individual needs.
1. Start early: Teaching your kids the value of a dollar and the virtue in saving is just as important as forcing them to say “please” and “thank you,” share with others, or clean up after themselves. Besides, if we’re going to teach them basic math skills like long division and the multiplication tables, we might as well teach them basic budgeting too.
“Personal finance education must start at younger ages,” Vickie Bajtelsmit, academic director for the Jump$tart Coalition for Personal Financial Literacy and a professor at Colorado State University, told CardHub in a recent interview. “Kids are so much more receptive than adults.”
One of the best ways to teach young children sound financial values is through computer and smartphone games. Savings Spree, Financial Football, Fraud Scene Investigator and The Lemonade Stand Game are all examples of fun and instructive games for kids that have a personal finance twist.
2. Load an allowance onto a prepaid card: Giving your child a regular allowance (say, biweekly) and requiring them to pay for some of their own extracurricular activities is a great way to teach budgeting. You can expedite the learning process by disseminating this allowance via a prepaid card. Prepaid cards are great teaching tools because they only allow you to spend the funds that you load. In other words, you can’t rack up debt or overdraft your account. They also provide online account management tools, thereby allowing you to review your child’s spending habits with them, offering instruction as you go. Plus, there are just enough fees to avoid that your child will be forced to adopt responsible usage habits.
3. Progress from cash to a checking account: You want your child to have experience using all of the different types of financial products and payment methods they will encounter in the course of adult life. So, once your child masters basic budgeting and prepaid card use, you can gradually introduce larger allowances at longer intervals as well as new payment responsibilities. Providing a portion of this allowance in cash and depositing another portion into a checking account will test your child’s ability to keep track of hard currency and their ability to minimize the cost of everyday banking.
4. Tie financial literacy to current events: One of the best ways to engage young adults on the topic of money is to draw them in with pop culture and news. Sports, politics, and entertainment are rife with financial angles – from salary caps and budgets to ticket sales and taxes.
“As any parent of a teenager might point out, kids are not very future-oriented on a personal level, but they do care about the world and social issues,” Dr. Alicia Dowd, co-director of the Center for Urban Education at the University of Southern California, told CardHub. “Educational researchers emphasize the importance of active learning and projects that take on real-world problems–this applies to learning financial concepts as well.”
5. Connect college planning with financial planning: Affordability is an extremely important aspect of choosing a college these days, given rising tuition levels, the uncertain job market, and the mountain of student loan debt we’ve amassed. Far too many families choose to ignore it, though.
“I’m still seeing students and parents whose first reaction to pay for college is to borrow, no matter the long-term cost,” says Brad Barnett, senior associate director of financial aid at James Madison University. “This is opposed to selecting a more affordable education opportunity than perhaps the student’s first choice, and/or finding ways to trim their lifestyle and expenses to make college more affordable.”
Your job as a parent is to explain to your child how much you can contribute to their education, and exactly how their choice of schools will impact their finances for years following graduation. They have to approach the decision economically, considering the cost of each school in terms of their expected return in terms of a job or acceptance into a certain graduate program four years down the road.
6. Start building credit: You should open a student credit card for your child as soon as they turn 18 in order to begin building the credit history that will be necessary to rent an apartment, lease a car, save on insurance and even qualify for certain jobs after graduation. Like it or not, credit cards are the most efficient credit-building tool available to consumers, and good credit is next to priceless in this day and age.
This advice might, of course, raise questions among those of you who are under the impression that people under the age of 21 are now prohibited from getting their own credit cards. That’s something of a misinterpretation of the law, however. Anyone over the age of 18 can still get a credit card; they just need reasonable access to the income necessary to make monthly minimum payments. It’s a good thing that young people can start early too, considering the time it takes to build good credit and the importance of learning how to leverage debt responsibly at an early age.
Ultimately, as Professor David Braun, chair of the Business Administration Department at Los Angeles Pierce College, notes, “The lack of financial literacy in the United States is a scandal. Young people graduate high school and have no real idea how a credit card works or who makes money when you use a credit card. They do not understand insurance from car to health to life, they have no idea how the stock market, or any type of investing operates.”
We can and must change that, however. It’s our duty as parents in the era of globalized economics and fingertip financial access. We have the tools at our disposal; now it’s just a matter of acting.
Odysseas Papadimitriou is CEO of the personal finance websites CardHub and WalletHub. He previously worked as a senior director at Capital One.
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