Monday, December 12, 2011

What do our Kids Really Understand about Money? 5 Assumptions that Parents Often Make

There’s a family story that my mother loves to tell from years ago when I was a child.  She was fixing dinner one night and heard me crying in my room.  Without stopping what she was doing, she yelled for my older brother to leave me alone.  His response?  “Mom, I’m not even in the same room with her!”  My mother claims that from that point on, she never assumed that she knew what was going on with her kids until she laid her eyes on the situation.  I guess I need to take my mother’s advice and never assume that I know what is going on with my kids.  It is pretty darn good advice, not only for child behaviors, but also for teaching kids about money. 

Kids are exposed to financial events every day from a very young age.  They see us put gas in the car and pay at the pump, buy groceries, pay bills, send $10 to school to help pay for a field trip and pull out loose change to buy a soda.  They can become desensitized to the frequent ebb and flow of money and credit.  But…we can’t assume that they truly understand everything they see. 

What are some common assumptions that parents make regarding what their kids know about money?

  1. Money is a finite resource.  We assume that our kids know that there isn’t an endless supply of money.   I used to tell my mom to just “write a check for it.”  A current day version of that would be “just use your credit card.”  Young kids may not understand that money is a limited resource.  For most of us, there is definitely a bottom to the bucket of money! 
  2. Money is earned.  We assume that our kids know why we go to work every day.  Our kids see us spend the money but do they really understand that it must be earned first?  When they are very young, they see us go to work, come home and buy the things we need.  They need to understand that “going to work every day” is what provides the money.
  3. Big ticket items require budgeting.  We assume that our kids understand the saving, budgeting and comparison shopping that goes into buying a big ticket item.  However, if all your kids see is you deciding to go to the store one day and get a big new TV or a new laptop or a new car, they may not know that you have been saving for this for a year or more.  They need to understand the steps that were taken that ultimately led to the purchase.
  4. Money can grow.  We assume our kids understand that investments or interest can increase their money.  However, if your kids are used to putting $5 in the piggy bank and still having $5 a month later, they are not going to learn about growing their money.  They may not know about investments or interest or how these concepts could apply to them.   How do we teach them?  Give them interest on savings (MoneyTrail just added this feature).  Open a bank account with interest.  Let them try their hand at being an entrepreneur by selling cookies & lemonade, babysitting, mowing grass, washing windows….the choices are endless!
  5. Credit cards have restrictions and penalties.  We assume that our teens understand how a credit card works and how the credit card company makes its money.  But…where do they learn about credit cards?  Our kids just see us swipe them to pay for things.  They may not understand that you are agreeing to pay for the items at a later point and that you will be hit with late fees and interest fees if you don’t follow through on the agreement.  My daughter got a credit card offer in the mail recently that had 29.9% interest.  We discussed it and promptly shredded the offer.  Can you imagine the debt that could occur is someone got that card without understanding how credit cards work?


We need to all take my mom’s advice --- never assume that you know what is going on with your kids!  We need to talk with our kids about everyday money situations and enable them to be more active in managing their own money.    

14 comments:

  1. I think these are all great truths to point out to children.

    I feel like we are very open with our children about money and finances. They know about credit cards and saving to purchase items. My parents never really talked to me about money, I had to figure it out for myself. I hope to give my children a leg up so they can start making better choices sooner in life than I did.

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  2. Great article! Thanks for the tips, I'll use them with my children.

    @smallbizatlanta

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  3. I would say the most important one to learn quickly is #5. I know that when I was in college and signed up for my first credit card I had no idea about the high interest, the fees and that if I did not pay on time it was costly. Very costly! Your credit score is damaged and your future loans will become more costly. The quicker they understand that a credit card is a serious tool and they understand the possible implications on their future, the better.

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  4. @Niki Kudos to you for talking with your kids and getting them on a path of sound money management! Many families are hesitant to talk with kids about money but it can be done in an age-appropriate way.

    @SmalBizGoddess Thanks! Keep us updated!

    @Neo -- Credit cards can be a great tool when they are used correctly. Unfortunately, many young folks learn from costly mistakes. Thoughts on getting teens to "hear" the message?

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  5. Looking my godson and his money knowledge, it has recently become clear to me that kids have a hard time with it. It is one of those concepts that parents really need to explain thoroughly, otherwise you end up with kids like me. (Just kidding, my mom is great with money)

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  6. @Marissa It can be very difficult for kids to grasp when the only see one aspect of it --- the "gimmes". Just simple, daily conversations can make a big difference in their understanding. And...practice makes perfect. They need to practice money management to get good at it.

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  7. I think we do assume that kids know more than they do. I asked my 13 year-old how credit cards worked the other night, and he said, "You use it to buy stuff, then you have to pay it back." But he didn't realize how high the interest rates were or that a $4 pack of cheese slices could end up costing $50. It prompted a good conversation that had him concluding, "Credit cards are stupid because most people don't know how to use them!" I felt pretty good about that, and I never would have initiated the conversation if I hadn't read this post. Thanks!

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  8. Andrea @SoOverDebt --- That is awesome! Thanks for sharing the conversation between you and your son.

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  9. I agree with Andrea. As adults we tend to think kids and other people in general think as we do. This definitely not the case, especially with kids. So now I never assume.

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  10. We got Cashflow a little while ago and Maria thought that our son at 10 would not be able to play it. How wrong she was! He loves the game and now understands assets, liabilities, profit and loss. We are looking forward to a comfortable retirement home ...:-)

    Kids are far more capable than we think.

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  11. John@MoneyPrinciple -- I haven't tried out Cashflow. Our kids are 8, 11, 14 & 18. What ages do you think Cashflow is targeted for?

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  12. Those 5 are ALL very important financial lessons that too many kids don't understand.... this is a great outline for a kids PF class ;) And to be implemented over time... with real-life examples... finances can be a family discussion. Many kids learn from this and feel important when making a family decision.

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  13. Thanks to this article I am bringing money lessons up more specifically, more often. I occasionally watch "Judge Judy" and my daughter now knows from repetition and example that if you loan someone money, get it in writing AND/OR just consider it a gift, because it will end the friendship/relationship. These five items are a great reminder to bring it up often!!!

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  14. Thanks, Susan. Re-occurring conversations are extremely important for teaching your daughter about money management. Thanks for sharing what you do with her!

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