One of the most important tasks for parents to tackle while raising kids is ensuring that they have a proper understanding of how money works—how to earn it, save it, spend it, borrow it, and invest it. Teaching kids about money sets them on the right path to be responsible with it when they grow into adults.
Where should you start when it comes to teaching your kids about money? T. Rowe Price believes it’s best to begin with the basics and, in this case, that means vocabulary.
By age 5, T. Rowe Price recommends teaching your child the following terms:
- Savings Goal—a savings goal has three elements: (1) what you want to buy, (2) when you want to buy it, and (3) how much it will cost at that time
- Bank—a place that helps us safely store and manage our money
- Check—a way to pay for items where we write a note asking our bank to send our money to someone to pay for our purchases
- Bills—notes letting us know how much we owe for our purchases
- Trade Off—A decision we have to make when we are considering whether to save for something or spend our money
These concepts are usually easy enough for 5-year-olds to understand and are important to create a strong foundation for future and ongoing money discussions.
By age 10, your children should be able to understand the terms:
- Interest—money you are paid for lending your money or an amount of money that is added to money you borrowed
- Loan—money that’s borrowed and is expected to be repaid, usually with added interest
- Time Horizon—the amount of time that you will save for a big purchase
- Inflation—a general increase in the price of goods and services over time
- Taxes—money that we pay to the government to help pay for public programs and necessities, like roads, schools, and libraries
These are all terms that build upon what your children may already know about money. A basic understanding of these terms will help your children to better interpret the money discussions you are having with them.
By age 15, you should teach your children the definitions of:
- Investing—putting money into assets (like stocks, bonds, mutual funds, etc.) to help you reach your financial goals
- Asset Allocation—how your money is divided among asset classes such as stocks, bonds, and short-term investments
- Diversification—spreading your money amongst various types of investments (different kinds of stocks and bonds)
- Stock—a share of a company that is sold to the public
- Bonds—an IOU issued by the federal government, state governments, or corporations in which you earn interest, and receive your investment back at a later date
But what if you run into roadblocks and need a little help with understanding these terms or with teaching your kids about money?
T. Rowe Price has created many tools to help parents with these important tasks, including a resource site for parents at Money Confident Kids and the Star Banks Adventure® online game and app, which offers lessons on goal setting, spending versus saving, inflation, and diversification.
These tools are designed to help parents make the topic of money fun and interesting to their children, while imparting critical money skills to help their children gain a strong understanding of finance for their future.