Financial Terms Kids Should Learn

Most schools don't teach financial terms or give children the tools to understand and manage their money. This is something which could have a substantial effect on their lives but is left up to parents, or the child themselves to learn about. If you can get your children familiar with the finance terms which they will face as they grow up, this will give them an education which they will benefit from throughout their lives.

One of the things I really appreciated about my folks when growing up was how they educated me on finances, especially investing. I was different than many of the kids my age who's money would burn a hole in their pocket the moment they got it.

Helping your kids understand financial terms is a gradual process that you should teach them when you believe they will be able to understand the concepts. Often it is better to help them understand these things earlier, to allow them to form better financial habits through their life.

Let's take a look at some of the most essential financial terms kids should learn.

Savings

It is easy for kids to not consider the cost of things; they want the toy they've just seen and don't understand the consequences. The idea of savings can be introduced at a young age, perhaps around four years, and can be started without even using money.

You could try giving them a couple of cookies and only let them eat one now, saving the other for later on. Then you could move on to giving them two cookies and putting one in a jar for the weekend. Then when the weekend is here, they have a pot full of cookies to enjoy.

Help them to understand that saving money works in the same way and open a savings account for them.

Interest

When your child has a savings account, they can learn about interest. If they put some of their allowance into the savings account, they will be able to see it grow a little. This should encourage them to save more and think more about what they want to do with their allowance.

When they get a bit older, you can explain to them that interest is not only paid on savings but is something you have to pay on loans you get.

Budgeting

If you can teach your child how to manage their money, it will give them a better appreciation of how to budget and better spend the money they do have. Have them set aside money for different things, some they can use now, and some which could be saved for a vacation or other event. Having your kids participate in the family budget is an excellent way to teach them about the value of money.

You can teach them about having goals in the process, as it is an easy way to tie in the explanation of why you set up a budget.

Tipping

Kids should have a firm grasp of the concept of tipping, and this education should start at an early age. They should know that if an excellent service is provided, tipping is a great way of saying thank you! Quite often, one of the first jobs a kid will have could involve tips, such as working in a restaurant.

The opportunity to teach your children could come earlier in life as well. If you get relocated often due to work, showing the kids how much you tip the movers could be an excellent life example. If you plan on traveling with your kids, there are ample opportunities to provide guidance on how tipping works.

Giving them with your expertise on what is an appropriate amount in various circumstances is very useful.

Credit Scores

Having a good credit score will pay dividends when your child needs a mortgage or a loan for their dream car. It will make it easier to get credit, and it will cost them less to pay back.

Explain that there are three credit bureaus that calculate scores based on people's credit histories. If you pay your bills on time, this leads to a higher rating, which allows a bank to lend you more money for less interest. Show them how to get their free credit report. When they receive the credit report, show them their credit scores and how they work.

Loans

A loan is a relatively simple concept, which you need to explain has to be returned to the lender. Like an item a friend might lend to them, the friend will want whatever it is back. You could then go on to explain how someone can buy a house with money borrowed from a bank, money which has to be returned gradually to the bank.

Another prime example is student loans. If there are expectations that your kids will go on to higher education at a college and you are not independently wealthy, teaching your kids early about financing will be necessary. Kids will want to be able to pay off their student debt to purchase a home. If they are like most, it will be sooner rather than later.

Debts

When children understand the idea of a loan and having a good credit score, this will allow them to more easily understand the concept of owing a debt.

Explain how the money lent for a mortgage is a debt, which has to be paid back. If this doesn't happen, the lender can take the house as payment. They need to understand that there are severe consequences to taking out a loan.

Explain to your kids early that if they don't pay back the money they owe in a timely fashion, it can hurt them financially for years to come.

Credit Cards

Your children need to understand how credit cards work. If they want something in the store but don't have the money on them to pay for it, you could agree to lend them the money, like a credit card.

You would tell them that this would be an interest-free loan as long as it is paid off when you get home, any longer and you will add interest. This should teach them that credit cards have an interest-free period as long as you pay back the amount quickly.

Investing Money

Once your children are older and have got the hang of saving money and the interest they can earn, you can introduce them to the idea of investing. The purpose of investing money and getting a return should be explained without missing out on the risks involved.

There are stock trading games which older children could play to understand how investing works. They will have fun and discover the benefits of investing. They will no doubt lose some of their virtual money as well, which will teach them to try to assess better the risks involved in purchasing stocks.

Taxation

Taxes can be explained as a way of paying for things that everybody uses in society. A percentage of income being deducted by the Government to cover the cost of these expenses. You could even take a portion of their allowance to pay for something the family needs if you want to really drive the idea home.

Show them a copy of the tax bill on your home so they understand just how significant this expense can be.

401K/Retirement

You don't need to worry kids about a 401K until they are a little older. If they understand savings, a retirement fund shouldn't be a difficult thing to understand. They do need to realize that the sooner such a fund is started, the more it will be worth when they retire.

One of the things I value most about my parents is the fact they taught me about investing at an early age. When you are young, you don't really understand the power of compounding, but when you get older, it really strikes a chord.

By starting your kids young with investing their own money, you can really put them in a much better financial situation later on in life.

Final Thoughts on Financial Terms Kids Should Know

Starting a child's financial education at an early age is just plain smart. By educating your kids early, you'll put them in a much better situation to succeed financially as they grow older. Do your best to answer any financial questions as they come up.