Lately I have had a fair number of conversations regarding kids and finance. Most people I talk to know that I was a teacher, but are often surprised to find out that personal finance is a hobby of mine (that is if personal finance can be a hobby). Then something clicks for them and they say something like “they really should be teaching kids these days more about finance.” I, for one, couldn’t agree more. The schools spend years cramming STEM activities down the poor kids throats yet neglect to ever explain why carrying a balance on a credit card at 18% interest is a bad idea. Of course lets not be too hard on the kids. After all I could just as easily say “parents these days, don’t they know anything about finance?” Sometimes it is easy to forget that ‘kids’ are more than capable of learning about personal finance if we would only teach them (and lead by example).
My own kids first official financial lessons began when we decided to make a big push to pay off our mortgage. For whatever reason our hometown bank didn’t allow extra payments to be made towards our loan online. Apparently their system would get confused and think you were making advanced monthly payments. Anyways, I had to actually walk into the bank and ask them to transfer money from my checking account and put it towards the principal of my mortgage. I then received a little yellow receipt showing the transfer and my new account balances. Although at the time I found this archaic I can now see its benefits. I don’t know about your kids, but after doing this a couple of times with my kids in tow they started asking questions. I could have said it was adult stuff and left it that but instead I showed them the receipt and started answering their question. Below are a few of their most common questions and my answers.*
Kids: What’s a mortgage?
Parents: Well houses cost a lot so the bank lends you money to buy it.
Kids: Why are you spending money on it?
Parents: I’m paying extra now so that I get done paying the bank back sooner.
Kids: I thought you already owned our house?
Parents: Yes we sort of own our house – that is unless we stop making payments to the bank. Then guess what the bank can do? (The kids figured this one out by the way.)
Kids: They just give you the money? That’s nice.
Parents: Not really. When I borrow money from the bank they charge me interest.
Kids: What’s interest?
Parents: I pay the bank back what I borrowed plus extra money. This extra money is interest – the bank charges me money if I borrow money.
Yes this can get get painful, but eventually they started to grasp all these concepts and more. Such as:
Kids: Why don’t you and mom like debt?
Parents: Well we really don’t like owing other people money. Even more we really don’t like spending more than we have to. Debt costs money. Instead we prefer to have assets.
I didn’t confuse them with interest free financing
Kids: What’s an asset?
Yes I walked into this one.
Parents: An asset is something that is worth money.
Kids: Like our car?
Parents: Uh… no I don’t count the car as an asset. My bicycle is worth more than our car (this is true). Let’s instead say an asset makes us money or saves us money. Like stocks, bonds, 401k’s, Roth IRA’s.
Kids: And our house?
Another loaded question.
Parents: We decided that once your house is paid off its an asset because you live rent/mortgage free thus saving money.
None of this knowledge transfer happened overnight. The kids were six and eight when it all started and now they are 11 and 13. However, every question leads to an answer and every answer usually leads to yet another question. If you grabbed a random person off the street and forced me to either a.) follow their financial plan or b.) a financial plan my kids conjured up I can assure you I’m not willing to take the risk. I’ll choose my kids plan. So yes the schools could do a better job teaching finance.** Yet personal finance isn’t really on a standardized state test (at least I don’t think it is) so the job is up to someone else. I would advise making sure someone gets the job done.
Enjoy the ride,
*It wasn’t uncommon for me to answer the same question on multiple occasions. Persistence pays off, trust me.
** Don’t get me started on student loans. I personally think there should be a 9 week class (minimum) for all High School seniors explaining all of the wormholes student loans can lead down. I’ll save that for another post.