Teaching Kids About Money A Financial Literacy Presentation by Member Name, CPA

Money Basics Adults in trouble today because they didn’t learn lessons earlier in life Not learning it in school Must know about budgeting, credit, saving Hands-on activities for kids Whether your child is trying to make sense of “See Spot run” or preparing to take the SAT for the second time, there are some money management basics students of all ages should know before they leave the nest. Too many adults are in financial trouble today because they didn’t learn basic money management skills when they were young. Parents sometimes think students are getting these financial basics at school, but the truth is, few states require schools to teach personal finances. In Texas, personal finance lessons are incorporated into the economics class most students take as seniors. Limited exposure to basic financial concepts like budgeting, credit, and saving makes it hard to avoid the financial pitfalls of credit card debt and paycheck to paycheck living so common among adults today. Today, I’ll share some hands-on activities you can use to make sure the children in your life are at the head of the class when it comes to handling their finances.

Start Out Young Never too early Toddlers – money recognition, spending, saving Show coins and explain value Piggy banks Pretend grocery shopping Start out young It’s never too early to start talking about money. Toddlers and very young children can understand basic financial concepts like money recognition, spending, and saving. Show children various coins and explain the value of each currency. Toddlers can begin learning to save by regularly setting aside money in a piggy bank. Even a game of pretend grocery shopping can help small children understand that it takes money to purchase goods and services.

Elementary School Budgeting, goal-setting, borrowing money Weekly allowance, if possible 80-10-10 rule First savings account Credit cards ATM machines Moving on to more complex financial concepts Once children are in elementary school, children can be exposed to more complex financial concepts like budgeting, financial goal-setting, and borrowing money. It’s some parents’ worst nightmare, but consider taking your child to the grocery store with you. If you’re a coupon clipper, have them match the coupon with the item you need. Explain your grocery budget and how you use the coupons to get the greatest amount of groceries for your money. Explain budgeting as simply your family’s plan for how much you plan to spend in a particular area, like groceries. If financial circumstances permit, parents can provide their children with a weekly allowance. An allowance is a child’s first step toward financial planning and goal-setting. They won’t use those words, but receiving a weekly allowance will help children set financial goals, like saving up to buy a new toy, and give them the means to accomplish these goals. What do you do when they want to spend their entire allowance on the latest computer game? Let them buy it. Don’t criticize them, but hold them accountable for their purchase. When they want to buy a toy at the toy store, remind them that they’ve already spent their allowance on the computer game. This will help them understand the need to save part of their allowance in the future. You can try teaching them the 80-10-10 rule. Encourage your children to save 10 percent of their allowance, give 10 percent to charity, and spend the other 80 percent. This is also a good time to open a child’s first savings account. Many banks and credit unions offer child-friendly accounts with no minimum balance and low fees. Take your children to the bank and show them how to make a deposit. You can even consider requiring them to put a portion of their allowance into their savings account each week. Encourage them to save regularly, even if it’s only a few pennies. By doing so, you’re building the savings habit. It’s a habit that will serve them well as they become adults. Elementary school children are the right age to begin a discussion of credit and ATM cards. Children see credit cards used regularly for transactions, and it’s important for them to understand how credit works and know that ATM cards withdraw cash directly from a checking or savings account. As we all know, money don’t grow on trees and it doesn’t come free from the ATM either.

Middle School/Jr. High Learn how to make money Extra chores for extra money Use pre-paid credit card to teach them about interest and using credit wisely Middle school and junior high Once children reach middle school, they’re capable of learning how to make money. You could allow them to do chores around the house for additional spending money. This helps reinforce the idea that one must work to earn money. Parents of middle school and junior high students can also teach them basic investing concepts like compound interest. Consider giving your child a pre-paid credit card and explain to them how to use credit wisely. This is an opportunity to explain how compound interest works for you when your money is invested properly and how it works against you when you are charged interest on your credit card balances each month.

Stock Market Investing vs. saving Set up mock portfolio Invest in what you know. Research companies online/financial pages Two options for entering stock market: Buy mutual fund. Open stock account for child. Introducing your child to the stock market Before you start building an investment portfolio, it’s important for your child to understand some basic investing concepts, beginning with how investing differs from savings. Use examples to show how you might “save” for a short-term goal, such as buying a video game, and “invest” for long-term objectives, like college tuition. Next, cover the basics, including the importance of diversification, liquidity, and the correlation between risk and reward. Building an investment portfolio Before your child actually invests any real money, it’s a good idea to set up a mock portfolio. The Internet offers a number of investing simulation games. Or you can do this on your own by helping your child construct and monitor his or her own portfolio of stocks. Like adults, child investors should invest in what they know. Have your kids compile a list of companies that make products they are familiar with. Disney, PepsiCo, Nike, and Microsoft are a few that quickly come to mind. Help your child look in the financial pages or on the Internet to find the current price of each stock. Every week, for a few months, monitor the company’s financial performance. Also encourage your child to look for news stories about the companies selected. Will the new spokesperson for Nike push up its stock price? Is the latest soft drink on the market likely to flatten Pepsi’s growth? This might be a good time to explain the virtue of riding the market’s ups and downs. When you feel your child is ready to enter the market for real, you have two options. Buying a mutual fund is the simpler approach, but kids may find it more exciting and easier to relate to a company rather than a “faceless” fund. Your child can use experiences with the mock portfolio as the basis for buying decisions. Should you decide to go with a mutual fund, there are thousands of funds to choose from and most hold investments in some kid-friendly companies. In fact, there are a few mutual funds geared especially for young investors, and these often provide educational materials as well. Before investing in a mutual fund, you and your child should review the fund’s past performance. Once opened, carefully examine the monthly or quarterly statement you receive. Opening a stock account for your child Minors cannot own stocks or open brokerage accounts in their own names. However, parents can set up custodial accounts under the Uniform Transfer to Minors Act. These accounts are opened with the child’s name and Social Security number, but the custodian controls the account until the child reaches the age of majority. Whether you open a mutual fund or brokerage account, be aware that any net investment income above a certain level ($1,600 for 2005) received by a child under age 14 at the end of the tax year is taxed at the parent’s marginal tax rate. Consult with your tax advisor on the potential tax consequences of your decisions. Avoiding high fees and commissions Many companies allow you to make initial stock purchases directly without going through a broker. The company’s dividend investment plan (DRIP) is used to buy additional shares. Buying just a few shares in a company can be expensive, but there are ways to do it economically. There are sources available on the Internet, such as www.oneshare.com, that allow you to buy a single share, and several discount brokers featuring no account or investment minimums. Purchasing stock means you’ll receive the actual stock certificate framed, along with annual reports, dividends (if declared), and any other benefits provided to shareholders. While one share may not sound like a lot, according to www.oneshare.com, if you owned one share of Microsoft after its initial public offering in 1987, today you would have 144 shares.

High School Should know how to earn, save and spend money responsibly Checking account Be able to balance it Know how to use credit cards wisely Reading a paycheck Involve teens in bill-paying High school graduation is looming By the time students enter high school, they should understand how to earn, save, and spend money responsibly. Students can open a checking account and learn how to balance a checkbook. Parents should be sure that high school students, college-bound graduates in particular, understand the dangers of credit cards and know how to use credit cards responsibly. Getting a first paycheck can be a puzzling experience for a student holding a part-time job. They are not accustomed to reading a paycheck and are often surprised about the amount of money withheld for taxes. Parents can take the opportunity to review the paycheck with the student and explain how the taxes collected are used to build roads, provide police and fire department services, and fund other government programs and services. This also may be a good time to talk with students about filing a tax return for the first time. If you’re comfortable with disclosing your family’s financial situation, have your teenager sit down when you pay the bills. Show them the electric bill and explain what steps you take to keep that bill as low as possible. Go through each bill you need to pay and give them an idea about how much money your family spends each month. If you keep your family budget on your home computer, ask your teenager to input data into your budgeting software. This will help prepare them for financial life without the Bank of Mom and Dad.

Birthdays/Special Occasions Give money-minded gifts Books, board games, videos, software Play ATM machines Pretend checkbooks Voice-activated/keypad safes Money bingo Give U.S. savings bonds Don’t overlook birthdays and special occasions Use birthdays and special occasions to reinforce the financial concepts you’re teaching. Books, board games, videos, and computer software that teach children to use money, make change and accrue savings are great gifts. Check your local educational toy store for some of these items. Toys that allow children to play “grown up” have always been popular. Now, children can go to their very own ATM machine to make withdrawals and check account balances using a secret Personal Identification Number (PIN). Some products even come with a play debit card and feature a motorized bill feeder and coin recognition. A pretend checkbook starts the important lessons of accurate recordkeeping and bank reconciliation at an early age. With the checkbook and pen come instructions on how to write a check and how to use your check register. If you have more than one child, you know how important it is to keep allowance money safe and hidden away from siblings. Piggy banks aren’t quite as hip for 12-year-olds as they are for the 5-year-old crowd. Replace the piggy bank with voice-activated or keypad safes. These safes come decorated with a variety of characters like Spider-Man to Bratz dolls. You’ll still be encouraging your child to save, but you’ll be helping them keep their money safe. Look at games like bingo that take a spin on the traditional letter and number call-out by matching money amounts to pictures of real coins. These teach addition and the money recognition skills your children need to know. Don’t overlook savings bonds. U.S. Series EE Savings Bonds are one of the safest investments around. These bonds can be purchased in increments of $50 to $10,000. The interest rates change every six months to keep up with inflation and the bonds will earn market-based rates for 30 years. It takes about three weeks for gift bonds to be delivered. If you need it sooner, your bank can provide a gift certificate to present to the recipient in the meantime.

Any Questions? More information Parents and children can visit the Texas Society of CPAs’ consumer Web site, www.ValueYourMoney.org, and find additional money management information. We rightfully focus much of our attention on making sure children excel at core academic subjects like reading and math. But the financial world is only going to grow more complex, and we can’t forget about teaching them the basic financial truths they need to know.