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Teach Your Kids About Money (They'll Thank You Later)

Money can be a tough subject. In some families it is taboo. Other times it is just too abstract. Here, Kate Ashford outlines a few fun and concrete ways to talk about finances with your children. 

As parents, we pass a lot of wisdom on to our children, but we seem to be leaving money know-how up to chance.

I recently realized that my oldest daughter, who just turned five, doesn’t know a penny from a quarter. That may not seem significant, but part of the problem with financial literacy today is that money isn’t tangible anymore. Americans are using plastic for about three-quarters of all point-of-sale purchases, according to a report by Javelin Strategy & Research. That means kids aren’t seeing money exchanged, and they aren’t handling it or seeing their parents handle it very often.

Here are a few strategies for upping your kids’ financial games:

Use cash whenever possible.

If you are primarily a credit card user—and most of us are—your children see you use a piece of plastic to magically buy things. They have no idea that you must then pay for the charges on that piece of plastic with the money you have earned. The more you can show your children that you must pay cash for the things that you buy, the more concretely they will understand how money works.

Try this: Consider a piggy bank with compartments, such as the Money Savvy Pig, which allows your child to watch change pile up for saving, spending, donating and investing

Give them hands-on practice.

You wouldn’t send your child out the door with the keys to your car without a few test drives, would you? (If you would, there are different things you should be reading right now.) The only way your children will ever learn to manage money is by doing just that—managing it. An allowance is a great learning tool, and you can start when children are very young. Many experts recommend one dollar per week per year of age (so, $5 a week for a 5-year-old) but you can play that by ear. As they get older, you can make them responsible for an increasing amount of their own expenses. If they have to shell out their own cash for those expensive shoes, they might reconsider it.

Try this: Offer younger children the ability to make extra cash by doing odd jobs around the house, such as weeding the garden, watering plants or washing the car.

Incentivize savings.
If you give your children money, they will spend it. Promote savings—and teach the power of compound interest—by matching your kids’ long-term savings with your own money. That might include saving for a car or college. Just be prepared—if you make the offer, they may save more than you anticipated.

Try this:  Steer your children toward the Compound Interest Calculator on Investor.gov so they can see how much money they can amass over time. Real numbers can be more persuasive than a parent nattering on about interest and savings rates.

Teach them the ways of plastic.
For the love of Mastercard, please do not send your kids to college without understanding how credit cards work. You don’t have to get them one; you can start with a debit card linked to a savings account—preferably theirs—at a local bank. Show them how to track their balance and consider letting them bounce a transaction or two so they realize that going over budget has consequences.

Try this: If you use a credit card, have your children sit next to you while you pay the bill each month. Show them the interest rate and explain what would happen if you didn’t pay the balance in full each month. The goal: That your child won’t be a college student who graduates with $3,000 in credit card debt, which was the average for the Class of 2013.
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