Financial Terms Parents Need to Teach Their Children

Monday, July 06 at 10:40 AM
Category: Personal Finance

If there’s one subject that has the ability to impact kids throughout their entire lives, it’s personal finance. The following is a list of financial terms that experts say every kid should learn. Even if your kids are into their teenage years, it’s never too late! Go through the list to make sure they have a good understanding of each term.

1. Saving(s): Age 4+
Saving is one of the best topics to introduce at a young age. It’s easy for kids to grasp and can have a huge impact on those who embrace it early. Here’s a great way to illustrate savings to youngsters - start by giving your child two small pieces of candy during the day. Let them eat one right away and save the other until after dinner. Then each day for a week, give them two pieces, but have them save one in a special place. When the week is over, they’ll be excited to have a bag full of candy. Explain that saving money works the same way — when you regularly put a little bit aside, in time it will add up to something big. Arvest is happy to offer a savings account option that is designed specifically for kids – our Cool Blue™ Savings account!

2. Budget: Age 8
A budget is plan that you make to keep track of your money and where it is going. One great way that a lot of parents teach kids how to budget is with “give, save, spend jars.” Whenever the child earns money they divide it between the jars. The “save” jar is money that’s intended for a longer-term goal; money in the “spend” jar can be used any time for smaller purchases; the “give” jar is money that will go to a charity of their choosing.

3. Loan: Age 8
A loan is something that is borrowed, often money, which has to be paid back with interest (see #5 below). Most kids get the basic concept of a loan because chances are, at one time or another, they’ve lent something to a friend or sibling and expected to get it back. Start by explaining some of the reasons people take out loans. For instance, because it costs a lot of money to buy a house, most people borrow money (take out a mortgage) to pay for it. Car loans and student loans are also good ones to discuss – especially the latter for kids who may be taking out student loans in the future. While taking out a loan isn’t a bad thing, parents need to stress that when you do take on a loan, it’s your responsibility to pay it back.

4. Debt: Age 8
Loans and debt can be explained together. Like a loan, a debt is money that you owe someone that needs to be paid back. Once again, for younger children, a mortgage can be a good way to illustrate how debt works. Parents can explain that they borrowed money – took on debt – to buy their house and that they need to pay it back a little bit each month. It’s important for kids to understand that once you have a debt, it doesn’t go away until you’ve taken care of it.

5. Interest: Age 8-10
Interest has two sides: it’s either something you pay when someone lends you money or something that you earn when you lend money to someone else. Make it into a game to illustrate how it works: Ask to borrow a few dollars from your child’s piggy bank and then set up a schedule to pay it back over the next month with interest. When kids are older and can calculate simple percentages, have them do some math to see how interest adds up. Show them a credit card agreement that charges 15 percent interest and have them figure out how much extra money you would have to pay to carry a balance of $5,000 or $10,000 on your credit card, versus if you paid it off right away.

6. Credit/Credit Card: Age 8-10
Credit lets you buy something without having to pay for it right away. For example, if you use a credit card to buy a new bike that costs $200, the money doesn’t come out of your bank account. Instead the credit card company pays for the bike, then they send you a bill and you have to pay them back the $200. If you don’t pay them back right away, they will charge you extra money (interest). The longer it takes you to pay back, the more money you will owe in the end. Parents should also explain how a debit card is different, as it takes money directly from your checking account.

7. Taxes: Age 10-12
Chances are most kids know the word but few understand what taxes are. Here’s the explanation: taxes are payments that go to the government for the work that it does, such as improving schools and fixing roads. They’re taken right from your paycheck and the amount you pay depends on how much money you make. A great way to teach kids about taxes is to apply a tax to their allowance. Rather than giving them their full allowance each week, take away a percentage (the “taxes”) and put it in a family jar to be used toward a household expense.

8. Credit Score: Age 15+
Once you plan to give your child use of a credit card, you must explain what a credit score is. A great way to explain it is with a social media spin - there are three credit bureaus, which calculate your “credit score” or how you use your money. The goal is to have a high credit score – more “likes” by the credit bureaus. The way to receive more likes (a high score) is to have a long history of paying your bills on time. When you don’t pay your bills on time or you have too much debt, your score gets lowered (fewer likes). It’s important to emphasize that a good credit score will help in the future if you want to borrow money to buy a house or a car. Meanwhile, a bad credit score can make it difficult for you to borrow money.

Article courtesy of Forbes.com.*

Links marked with * go to a third-party site not operated or endorsed by Arvest Bank, an FDIC-insured institution.
 
Tags: Budgeting, Credit Cards, Debt, Financial Education, Savings
Nelda Kibby on 7/21/2015 at 3:29 AM
I appreciated the information about teaching children to make thoughtful decisions about credit and interest. Your suggestions for the age children should learn each new concept was helpful.

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