This post was sponsored by Lexington Law.
As parents, we are all looking to make sure our kids have a well-rounded education in all areas. Of course, they need their reading, writing, and arithmetic, but we can’t forget those life skills that we use every day without thinking, like healthy financial skills. Many states have no financial literacy requirements for schools. So how can parents step up and fill the gap left by the American education system? Lexington Law, a leading credit repair provider that regularly advises clients on healthy financial habits, has shared 5 everyday financial literacy lessons you can intentionally teach your kids.
You really can’t start teaching this principle too early! Teach your kids the art of saving. When your toddler is begging for that new Paw Patrol toy, give them an opportunity to work towards earning it through small, age-appropriate tasks and saving their money as they go. Encourage them to save as much as they can and set goals for themselves to make sure they make saving a priority. What are their short-term goals? Find out what they want to save towards and work out how to save enough to buy it. Consider setting up separate savings vs. spending categories with set percentages.
2. The Importance of Budgeting
A great way to help your young child understand how finances and budgeting works is to take them grocery shopping. My mom always brought me along grocery shopping with her, and I’m so grateful for the skills she taught me on our weekly grocery store run.
Before you go to the store, sit down and go over your budget and shopping list. Discuss how much you have to spend for the trip as compared to how much food you need for the week. You can even clip coupons and set a savings goal together. As a child, I loved this challenge and always liked to do the coupon search for our family.
When you go to the store, have them help you find each item on your list, and make sure you stay on budget. If you’re over, put the item back and discuss alternatives to cut costs and still have enough food for the week.
This will teach them the importance of not living beyond their means and that loans and credit cards aren’t free money. Teach your kids that they should never buy or borrow if they can’t afford to make the required payments. And as they get older, teach them about credit and how bad habits can hurt their credit scores and impair their ability to get loans, rent an apartment, and more.
3. Make Sure They Understand Debt
Debt is something that I’m so grateful my parents did a good job of educating me about. They made sure I understood the consequences of spending money I didn’t have. It’s served me well in my adult years and especially those first few years out of the house where my first credit card looked really tempting. Many young adults take on credit card and student loan debt without truly understanding the cost – both today and in the long run.
To avoid mistakes, start teaching your kids about debt before they have the chance to acquire any. For example, if you have a mortgage, sit down and explain how much of your monthly payment goes towards paying off the principal vs. accumulating interest. For a credit card bill, show them how the debt would grow if you only paid the minimum vs. the full amount. You can also use online calculators to create hypothetical debt scenarios with whatever they’re interested in – perhaps the accumulation of interest from buying a new gaming system on extended credit terms vs. paying it off right away.
4. Weigh Loan Amounts against Earning Power
For kids getting ready to leave for college, it’s important to consider their future earning potential when deciding how much to take out in student loans. This is also a good practice to teach kids to do before they get any type of loan in the future, whether it be for a new car or their future home.
Consider making a hypothetical practice budget with their estimated entry-level salary, and see how much they can afford in monthly student loan payments. Websites like Glassdoor and Payscale are great resources for estimating salaries in your child’s industry of choice.
5. Help Them Understand How Expenses Work
A good way to do this is to go over your receipts to help them understand the cost of the items they use on a regular basis. Your child may be surprised to find out how expensive their gaming systems are compared to a week’s worth of groceries, for example.
You can also consider having them get a part-time job and begin paying for their own discretionary expenses to learn the value of a dollar and how much work is required to purchase the things from their wish list.
If they’re not old enough to get a job, consider a rewards allowance rather than an automatic allowance. For example, if they do a certain amount of chores each week, they earn a set amount of allowance. I loved having this opportunity as a child. It gave me a lot of dignity and made me feel like the work I did was valuable. It did a lot to teach me how to do hard things and prepared me to be a good employee.
Overall, the best way to teach your kids healthy financial principles, like everything else, is to model them! Only 30% of Americans were able to pass a basic financial literacy quiz according to a study by economists Annamaria Lusardi and Olivia S. Mitchell. If this is a challenging area for you, pick your head up, do some research, and make small sustainable steps towards better financial choices. You’ll be glad you did and so glad to have these skills to pass on to your kids.
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Disclaimer: I have teamed up with Lexington Law in support of this campaign. We received compensation for participation in this campaign. However, all thoughts and opinions are my own.