Isn’t it funny how we are taught multiplication tables at school, but no one teaches us how credit is built or how mortgages work. It is time our attitude to financial education changed, as the younger children know about the workings of money and economics, the better. If you have kids and you’d like to prepare them for entering the financial world, the following are some important points to keep in mind.
Loans and Credit
The most confusing thing – for most adults and children – is building a credit score and how it works. Explaining to a child or young adult that they’ll need to prove that they can be a responsible lender by taking out small loans and paying them back in a timely fashion is all very well but you need to show them what that actually means. Start off by explaining the concept of personal loans and how borrowers get matched with personalized offers depending on their spending habits and requirements. Talk to your child about securing the loan amount and how the repayments will need to be paid back over an agreed timeframe.
Now let us put that into practice. If your child would like a new laptop or PlayStation controller, why not give them a loan instead of buying the gadget out of your own pocket? Assuming they get an allowance each week, they can pay back the loan in small amounts. This will teach them the concept of taking out a loan to pay for an item they really want. Reward them when the total amount is repaid and this will reinforce the importance of making repayments on time to build up a good credit score.
Banks
It is a good idea to set up a bank account in your child’s name as soon as they can understand the concept of saving money and how withdrawals work. Take them to the bank with you when you’re opening the account and talk to them about the different types of accounts and what they mean. Let them make a deposit and keep a savings book or card that will keep a running total each time a lodgment is made.
Make things fun and interesting by telling your child engaging stories and asking questions. Get creative at home and set up your own bank and mimic what happens in the real world. You be the banker and use familiar terms like withdrawal, deposit, checking, interest, and APR. This is a great way of showing your child how the system works so they are prepared when the time comes to open their first bank account.
Coins and Cash
While most of us use contactless cards for most of our spending, nothing beats the feel of real money. You can teach your child about equivalency very simply by matching values in coinage and what they all equate to. Pennies maybe worth less than their actual value because of the cost of materials and there are pushes to phase the penny out, but a way of teaching how cash works and how financial equivalency works is to show that a hundred pennies equal a dollar.
You could even amplify this message more – since children inevitably copy their parent’s behaviors – by having a week where you pay for everything in cash. This will teach your kid how the process of withdrawing money from an ATM works. He/she will learn all about the value of money and the process of handing in bills and getting coins as change. Working in fundamentals like saving, charitable giving, and spending are all lessons that can be learned through this roleplay as well.