Introducing your Children to Personal Finance

While I was deployed to Romania, I decided to get my Accredited Financial Counselor (AFC) certification, which I am about halfway through completing. As part of gaining experience hours to achieve the certification, I started a financial blog called Finances at the Fort (www.financesatthefort.com). Although this was meant to be completely separate from Adventures in Single Dadding, the two blogs were bound to intersect at some point. At the risk getting “double credit” for one assignment and potentially alienating loyal followers, I wanted to share my article on teaching personal finance to the girls. Hope you enjoy it.

As part of my Accredited Financial Counselor (AFC) program, in addition to gaining knowledge to improve my personal financial literacy, I have also taken several classes on how to educate others in personal finance.  These curriculums have focused on young people (children), young adults (teenagers), adults, older adults, and even for small businesses (I am absolutely not an expert on the latter, so unfortunately, you will not be receiving any advice on small business finances at this time).  While going through the classes, I realized that I could do better in educating my children in personal finance, so I started implementing a program to do just that.

My daughters are currently Nine and Seven and are at the perfect age to start learning about personal finance. Thankfully, they already understand some of the basic tenants of finances and why it is important to learn more, so at least I have a solid foundation with which to start their financial education. Their schools have done a great job of teaching them about dollars and cents, as well as how to count them. Their schools have also taught them about saving, by keeping pennies or coupons from good participation that could be used at the classroom store, with bigger items costing significantly more. They understand that you can use money to purchase physical items (food and toys), digital items that are limited in duration (such as renting a movie), use of another’s facilities (children’s museum or the trampoline park), and for services (such as paying someone to clean your home, babysit, or fix your car). They also understand that I have a job so that I can make money to provide these things for them, including the opportunity cost (although they would never use that term) of buying more items; essentially, if you want more stuff, Dad will have to work more, but that means that you would get to spend less time with him. I started giving them an allowance a few years ago, with them each getting one dollar every Sunday. While it was not a lot of money and it was not tied to any chores, I did not give them any guidance on what to do with it; I just handed it to them, watched them put it in a purse, piggy bank, or random container, likely to just be lost in their room. They were both fairly good about not bringing their money to the store to make an impulse purchase of toys or candy, but I could be doing a lot more to increase their financial literacy. After going through these courses though, I absolutely knew that I could be doing better and now had a plan on how to accomplish this.

Using the Federal Deposit Insurance Corporation’s (FDIC) Money Smart for Young People curriculum (which can be found at the following link: FDIC: Money Smart for Young People), I started working towards improving their financial literacy.  Starting with the Pre-K to 2nd Grade curriculum (Gabriella is currently in 2nd Grade), they have already mastered the first two steps, Counting Coins and Learning to Earn.  They understand the different denominations of US bills and coins (as well as Mexican Pesos, Romanian Lei, and European Union Euro) and that I need to have a job in order to earn money to buy goods and services.  We have also covered Step 3, which is Weighing Needs and Wants.  They certainly understand the difference between food (need) and video games (want), including within each category;  while bananas and milk may be a need, candy and popcorn are definitely wants.  Teaching them this has really helped cut down on the “I need this, Daddy!” statements coming from the girls in the toy aisle.  As far as Step 4, Ready. Set. Goal., they have been introduced to the concept of setting goals, but we still have some work to do.  Using a vacation as an example, I have shown them that I have a goal in mind and that I need to spend less and save more in order to reach that goal.  It is a fairly rudimentary explanation, but at least it plants the seed that reaching goals is a process and not something that just happens.

Moving to Step 5 in the FDIC program, Super Savers, they understand that I have a bank account and that I can get money out of an Automated Teller Machine (ATM) using a card, but not much more than that.  Using some techniques that I came across in my AFC curriculum, I decide to get each of them a Savings jar and increase their allowance to something a little more substantial (than one dollar a week) to help them better grasp the concept of savings and spending.  Every week on Sunday, the girls get an allowance equal to their age, so Elaina gets $9 and Gabriella gets $7.  While I physically hand them the money, they have to put $2 (very roughly 20%) into their Saving jars every “pay day;” they can add more if they want, but have to do so when they receive their money (because otherwise they will eventually figure out how to game Dad’s system).  To simulate an actual Savings account, they earn 1% interest at the end of every month (unrealistic, yes, but they will not understand the difference between savings and investing if I only give them 0.00083% a month in interest).  As an example, if Elaina has $37 in her Savings account on May 31st, I will add $0.37 to her Savings jar (with her watching me add it so she can see the benefit).  It is certainly not a lot, but it will teach them that saving money can help grow more money (albeit very slowly).  Step 6, Borrowing Bills, teaches about loans and credit, and we have not dived into this topic yet.  They understand what a credit card is, but “Dad gives them a blue card and the lady gives me ice cream” is about as deep as that concept goes.  Without a current mortgage payment or car loan, I will have to start devising a way to teach them about loans and borrowing money.  The Pre-K to 2nd Grade curriculum is very simple, relatively quick to implement, and can certainly help introduce your child to some of the basic concepts in personal finance.

Moving into the curriculum for Elaina’s group, Grades 3-5, thankfully I have already covered a lot of these topics with her (while I do teach them to Gabriella as well, some are a little advanced for her age or understanding). As part of Step 1, I have taught her about needs versus wants, impulse buying (even though knowing will not stop them from begging for stuff at checkout), and the general concept of opportunity cost. We have talked about creating and meeting your financial goals, in line with Step 2, Get Set for Goals. In keeping with Step 3, I have also talked to Elaina about budgeting, although I use much smaller numbers to illustrate the point (“If Dad gets $20 a month, $2 goes towards food, $1 goes towards gas, $2 goes towards…, and I have $5 left for spending money.”). As noted above, we have already implemented Savings jars to start teaching the girls about Savings Accounts, which comes in Step 4, Save Your Money. I do need to start teaching them about why it is important to keep your money in a bank as opposed to in your house, as there is probably more than $100 in various containers strewn about their rooms.

In Step 5, Which Way to Pay?, the curriculum discusses credit and debit, as well as understanding the consequences of not paying your bills on time.  We are definitely not there yet, but once they understand the concept of Savings and Investing interest, I will introduce how it can work against them if they do not pay their bills on time.  In the next step, Step 6, Get Invested, I get to teach them the concept of long-term investing.  They are far too young to really understand different stocks, sectors, valuation, etc., but at least I can get them started on why it is important to invest and how it differs from Savings Accounts.  For the purposes of this exercise, they are investing in the Calkins Family Total Stock Market Index (CTSMX), so they do not need to worry about what they are investing in.  Very similar to their Savings jars, they have to put at least $2 (again, very roughly 20%) in every time they receive their allowance, with the option to add as much as they want.  There are some major differences though between the Savings and Investing jars though.  First, the interest rate for the Investing jars is 10% a month, significantly more than the Savings jar.  This means that if Gabriella has $25 in her Investing jar, on May 31st, I will add $2.50 to her jar.  And just like the Savings jars, they will watch me add the interest to their jar so that they see the benefit of investing.  The second difference between the jars is that they have to tell me a month in advance that they are going to take money out of their Investing jars.  This is to simulate volatility in the market and that investing is a long-term strategy; the Savings jar is a liquid asset, meaning they can cash it out any time, while the Investing jar takes more time to take their money out (it also gets them to understand that “timing the market” never works).  This should help to teach them that there are pros and cons to both saving and investing.  We have been covering Step 7, It’s Great to Donate!, for years, as we complete all our donations to charity together.  This was meant to help them understand that someone families, especially children, do not have it as good as we do, so we need to help out where and when we can.  The way that I have chosen to explain this to my children (at this time) is that these are “clothes for kids who do not have enough clothes” or “toys for kids who do not have toys.”  As far as Step 8, Career Choices, we have only briefly touched on the idea that some jobs make more than others.  As Elaina gets a little older, we will certainly be talking about the concept of careers and how much can be earned in the areas that she is interested in.

The FDIC Money Smart for Young People curriculum is a great guideline for teaching your children the basics of personal finance, while beginning to introduce them to more advanced concepts such as borrowing money, identity theft, and investing.  But there is always more that you could be doing to promote healthy spending habits in front of your children.  As an example, when I am at the commissary, if Elaina and Gabriella want to get Lucky Charms as their choice of cereal, I pick up a bag of Marshmallow Mateys and explain that it is the same cereal, in a less fancy package, for less money; if the Lucky Charms are on sale, then I let them know that I am purchasing it because it is temporality cheaper than normal, so it is okay to buy this time.  I do the same thing in front of them with buying Toasted Oats as opposed to Cheerios (but that is a double win, because we all know that Toasted Oats taste better than Cheerios).  Purchasing generic brands is a way to promote healthy spending habits in front of your children (maybe not healthy eating habits though, at least with the marshmallow cereal).  Another example is when I am purchasing a toy for them.  They have a specific dollar limit for what they can get, and if they want to go over that amount, they have to pay the difference.  This has helped to teach them about the value of money, as they consider it a lot more when it is their own money that they are spending.  The last example is about charity, and how I never miss the opportunity to teach them about helping others and supporting positive causes.  Using annual Boy Scout and Girls Scout sales as examples, the last thing we need in our house is more popcorn or cookies, but I am a softie when it comes to purchasing more of these because it specifically helps our friends and our community.  My former co-worker’s daughter got us to purchase nine boxes of Girl Scout cookies, and I did not feel the least bit bad about it because that purchase helped to fund their annual troop trip AND a very generous donation to a women’s shelter in Sierra Vista.  Making good financial choices while teaching your children about these choices is the best way for them to do the same in the future.

As with many things in life, especially personal finance, this is A WAY and not THE WAY to introduce your children to the basics of financial literacy.  Just like me, they are bound to make some serious financial mistakes, but hopefully, they come into it a little more informed that I was at each stage of their life.  If you have any examples of success (or failure) or any techniques that you have used to teach your children financial literacy, I am sure we would all love to hear about it.  I hope you enjoyed this article and look forward to more on this topic as they progress in their financial education.  For our next topic, we will focus on the importance of having an emergency savings fund, as life has a way of testing us when we least expect it.

Thanks for checking in on us.

Cheers!