The knowledge your children have about money can impact their financial well-being throughout their lives.
Research shows that financially informed individuals are better prepared to handle unexpected financial emergencies and are more likely to be saving for retirement. They are also less likely to exhibit negative financial behaviors, such as taking on too much debt. And, overall, they are more financially satisfied.
In honor of Financial Literacy Month, which occurs each April, we share tips to help your children develop healthy financial habits that can set them up for financial success.
Money lessons for all ages
Beginning at a very young age, your children (and grandchildren) may be ready to learn important lessons about money matters, including:
– Budgeting. Distinguishing between wants versus needs is fundamental to budgeting. When your children are young, talk to them about the things they need, such as nutritious meals and a comfortable place to sleep, versus the things they may want, such as candy, ice cream or the latest toy.
Older children, who are ready to receive an allowance, earn money for chores, or work for pay, can learn the value of a dollar by saving up for items on their wish list. And it may be helpful to let them know you have items on your wish list, too.
For example, although you may want to purchase a stylish and expensive sports car, you understand what you need is a safe and reliable vehicle to transport the family. Children can also learn about needs and wants, as well as the importance of giving back, through age-appropriate volunteering such as gathering canned goods for a local food bank or collecting gently used clothing for a nearby shelter.
– Borrowing. Older children, especially those who are college-bound or beginning to launch their careers, need to understand the potential reasons for and consequences of borrowing. In some situations, particularly, the loan may not be worth the price you pay, especially when you’re being charged a very high interest rate or using the funds to purchase unnecessary items. For example, a $2,500 credit card balance with $50 paid toward the balance each month (at a 16% annual percentage rate) takes seven years to pay off and accumulates more than $1,600 in interest charges.
– Taxes. When children receive their first paycheck, they may be startled to see what is subtracted in taxes, including Federal Income Tax, Social Security (FICA), Medicare and State Income Tax. Taxes can be complicated to understand with details that are ever changing. The Khan Academy offers a range of helpful videos that explain the basics, including how tax brackets work. In addition, the IRS has created tax tutorials for students that provide answers to some common questions about taxes.
– Investing. You can help your older children understand the ‘whys’ and ‘hows’ of investing by starting a conversation about financial goals and how to achieve them. Help your children understand the benefit of an early start due to the power of compounding interest, the asset classes that may comprise a diversified investment portfolio and how a Mason Financial Planner can guide them.
If you are already a Mason client, please contact your Financial Planner with any questions you may have about financial literacy. And follow us on LinkedIn to stay up to date on Mason insights.
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