Why does financial literacy matter?
Although financial decision-making is more complex today than ever before, 26 states have no financial literacy requirements at all in their K-12 education systems. Only four states mandate that students take a personal finance class in high school.
Considering that young people who don’t learn basic money management have higher levels of debt, accumulate less wealth, and are less likely to plan for their eventual retirement, this lack of education is a critical oversight.
Parents will need to fill this gap with a concerted effort to boost financial literacy in their families. One of the greatest gifts you can give your children is to help them learn how to be financially independent. Regular discussions about money can help young people to make good financial decisions, and also help them feel more confident and secure about their own futures.
What can you do now?
A little knowledge and a healthy attitude about money can go a long way in helping your children establish a bright future. With regular conversations about personal finance—and your own good example—you can give your kids a great start on achieving their hopes and dreams.
It’s important to emphasize the need to save for a rainy day. Open savings accounts for your children, and teach them about how interest works. Encourage them to always set a little bit of money aside from every payment they get. One way to promote savings is to start a matching program, contributing a small amount (such as 20 cents) for every dollar your child saves.
Children often think their parents are money machines. To teach them how to earn money, consider giving allowances as a reward for completed chores, high grades or good deeds. As you hand them the money, explain that once it’s gone, you won’t replace it. For older kids, starting a business, such as pet sitting or lawn care, can also offer valuable hands-on lessons about earning.
The Value of a Dollar
Take your children shopping with you and show them how to compare prices and quality, and how to apply discounts and coupons to save money. Point out to them how taxes are added to the cost of goods, and take the opportunity to explain what taxes are and what they are used for. If you use a credit card, discuss how to use it responsibly.
A budget can help kids learn to prioritize needs over wants. Using an electronic spreadsheet or piece of paper, help your children develop a budget by recording their monthly earnings and spending. Then show them how to project the amount they’ll earn in the next few months and plan for what they will likely spend it on. To provide an example, you could demonstrate how you pay the household bills while continuing to live within your means.
Although your children may still be too young to get a loan from an institution, they can still learn how to borrow responsibly from you. When you loan your child money, explain that borrowing usually involves interest, which compensates the lender (which in this case is you). You may also explain that borrowing often means repaying the loan on a schedule, and that failure to repay the loan on time is often costly – either in late fees or in damage to their reputation.
Have Fun with the Market
Ask your children what kinds of businesses sound interesting to them and then conduct research together to see if those businesses would make good investments. Teach your children how to look up stock quotes online or in the newspaper. If possible, buy a few shares of stock and get your children to join you in watching what happens to that investment.
Thinking About the Future
Although retirement will seem like a long way off, encourage older children to start an IRA (individual retirement account). They can contribute some of their summer job earnings, and then watch their investment grow. If they start saving as teenagers, imagine how much money they’ll have once they retire!
Make sure your children know not to give crucial information—such as Social Security numbers, bank account and credit card information numbers, and passwords—to anyone but a trusted source. They should never provide such information in response to a phone call, letter or e-mail they've received – no matter how friendly or official the circumstances seem. Similarly, they shouldn’t give out any sensitive information when visiting a website that doesn’t explain how it will protect personal information or doesn’t use encryption. In addition, they shouldn’t throw away old ATM or credit card receipts, bank statements or other documents containing personal information without shredding them first.
The material is for informational purposes only and should not be regarded as a recommendation or an offer to buy or sell any product or service to which this information may relate. Certain products and services may not be available to all entities or persons.
TIAA-CREF Individual & Institutional Services, LLC, and Teachers Personal Investors Services, Inc., members FINRA, distribute securities products. Teachers Insurance and Annuity Association-College Retirement Equities Fund, 730 Third Avenue New York, NY. 10017