There’s a specific conversation I frequently have with people around my age. As they get closer to middle adulthood and look back on everything they’ve learned about money, they start to wonder – why didn’t they teach us this stuff in school?
For whatever reason, the American education system is sorely lacking when it comes to personal finance education. You can easily enter adulthood without ever learning how to set up a budget, open a retirement account or build a respectable credit score. If school is supposed to set you up for success as an adult, that seems like a glaring blind spot.
That’s why it falls to parents to teach their kids about money. Here are some important topics to cover, and how to teach them lessons that will actually stick.
Share Your Mistakes
I grew up in a household where my parents were honest about money. They didn’t mind talking about how much they earned, how much they spent or most importantly, how much they owed. I probably learned as much from their failures as I did from their successes.
My parents are immigrants and had never seen a credit card before they moved to America. Entranced by the shiny plastic, they signed up for several, not realizing how easy it would be to rack up a balance. It wasn’t long before they racked up a balance that took them more than a decade to pay off.
After my parents learned their lesson, they always taught me to avoid putting more on a credit card than I could afford to comfortably pay off. Seeing how credit card debt affected them spurred me to pay off my student loans quickly and avoid other forms of debt.
I remember hearing conversations about their credit card balance and how they regretted taking on so much high-interest debt. I wasn’t old enough to grasp the specifics, but one thing was clear – they had made mistakes, and now they were suffering the consequences.
Don’t be scared to share your personal finance mistakes with your kids. If you put off saving for retirement and playing catch up, tell them about your experience and how you’re fixing it. They’ll learn best from your personal example.
Explain the Value of Compound Interest
One of the most important savings lessons anyone can learn is how compound interest builds wealth.
Compound interest is the concept of interest building on interest. When you save or invest money, you earn interest on your contributions. That interest will then be added to the principal, where it will earn more interest.
You can do this by opening a high-yield savings account for your child, preferably one that earns at least 1% in interest. Every once in a while, pull up their account statement to show how much interest they’ve earned. When they’re old enough, you can encourage them to use that money to open a retirement account.
Show Them How to Budget
Like any life skill, budgeting takes a while to master. The earlier your child starts practicing, the better they’ll be at making hard decisions as an adult.
You can do this during a family vacation or field trip. Give your kids a set amount at the beginning of the trip and tell them what they’ll be responsible for buying, like extra snacks or souvenirs. Letting them choose their own purchases will teach them how to allocate resources wisely.
Before the trip, you can explain what prices might be like and how to make decisions. If you’re giving them $30 and each toy costs $15-$20, explain how they can probably only afford one big toy or a couple small ones, but not everything.
Let Your Kids Make Mistakes
Credit expert and father Matt Schulz advises parents to let kids make their own money mistakes, even if they can prevent it.
“I’m a big believer in letting a kid experience buyers remorse,” he said. “Let them use their money to buy something they really want but that you know they’re going to forget about two days later. That can help them think twice before they buy the next thing.”
Chuck Jaffe, host of the “Money Life” radio show, witnessed this first-hand when his daughters were six and four years old. They were at an outdoor-themed chain restaurant when the girls spotted a toy in the restaurant gift shop, a puppet named Timber the Talking Tree.
Jaffe explained that they could each afford the toy, but it would empty their bank accounts. The girls each received a weekly allowance and were allowed to spend money however they chose. Jaffe told them they could share the toy and save some money, but they didn’t want to do that. So they each bought the toy.
Three weeks later, they stopped playing with it. What’s worse, it took them almost three months to rebuild their bank accounts to where they would be if the girls had just shared the toy.
Jaffe said this lesson has stuck with his daughters. Now in their twenties, they still decide on big purchases by asking themselves, “Is this going to be like Timber?”
Teach Them to Give
With online and mobile advertising, your kids are bombarded with images and links of products they want. Without proper guidance, they can easily end up spending their allowance on material goods as quickly as they receive it.
If your kids get an allowance, encourage them to donate part of it to charities and causes they care about. It could be the shelter where you adopted the family dog or a charity that works in your neighborhood.
Giving away money also reminds kids how lucky they are and how much they have. It’s important to teach your child the value of a credit score, but it’s also good for them to see how giving away $5 makes an impact on the world.
If you and your spouse give to charity, explain why it’s so important to you. Your child might even want to start their own fundraiser.
Zina Kumok is a freelance writer specializing in personal finance. A former reporter, she has covered murder trials, the Final Four and everything in between. She has been featured in Lifehacker, DailyWorth and Time. Read about how she paid off $28,000 worth of student loans in three years at Debt Free After Three.