Tax Tip of the Month: Teaching Kids about Personal Finance

teaching kids about financeThe new school year is well underway by now, which means students all over the country are finally back in the classroom after a long summer break. While these kids are no doubt getting an adequate dose of the three R’s in their daily curriculum, one subject that never receives enough attention—or any at all—is personal finance.

Personal financial literacy, commonly defined as knowledge of how money works on an individual or family level, is a vital skill for people in all walks of life. The lack of early and frequent exposure to fundamental concepts like balancing a checkbook or calculating interest rates results in high school and even college graduates that are unprepared to manage money when they enter adulthood. This in turn can lead to such problems as poor financial decision-making, excessive debt, bad credit ratings, and inadequate retirement savings.

To ensure your children receive the skills needed to successfully navigate the world of personal finance, it is imperative that you take it upon yourself to teach them the basics. Here’s how to do it:

  • Give your child a weekly allowance for performing age-appropriate chores around the house or yard to establish a firm link between work and income.
  • Help your child develop sound habits early on by stipulating that a certain percentage of the weekly allowance must be saved.
  • Open a savings account in your child’s name to help illustrate concepts related to interest earned and the time value of money.
  • Teach important lessons about compounded interest and the true cost of borrowing money by giving your child a small loan with interest attached, and then making weekly deductions from his or her allowance until the principal is paid back.
  • Use a personal accounting app or software to show your child how to record income, track expenses, and create a simple budget.
  • Enhance your child’s transactional skills by demonstrating how to withdraw money from an ATM, check account balances online, and swipe debit and credit cards to make a purchase.
  • Explain how taxes reduce real income and must be taken into account when making critical financial decisions.

This list represents just the beginning when it comes to instructing your child in the principles of personal finance; additional skills and more complex concepts may be introduced as necessity or circumstances dictate. The important point is that you make an effort to teach these things in the first place instead of leaving this vital task to an already overburdened school system.