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Teaching Children to Use Money Intelligently

The world is a magical place for kids. It’s a place of astronauts, princesses, and wonderful adventures. To them, money is just a thing that Moms and Dads use when it’s time to go out for ice cream. That’s all well and good, there’s no need for kids to know how to refinance a home (yet), but kids are smart, and it’s important that they know how to use money wisely. The best way to show them, is by showing them how money works in their life.

Their New Favorite Toy

Photo Courtesy of Paul Hamilton

A great way to show kids the value of saving money is by teaching them about goals. First, start by giving them a small allowance or allowing them to do extra chores for cash. Then the next time you take your kids to the store, ask them if there is a big toy they would like to get (something in the $20-$30) range. When they find something they really like, let them know that they don’t have enough money for it yet, but if they save up the money and don’t buy anything right now, that they can get their new favorite toy later. Once they get a bit older you can use the same idea to teach them about credit.

When my son was about 12 he wanted a new bicycle. He had saved up about $60 from birthdays and Christmas but a bicycle cost about $120. So I offered to loan him the balance with interest. We used a spread sheet to print out the payments which broke the payments down into Principal and interest so he could see how much of each payment was actually reducing the balance of his loan. After a few payments he realized that his balance wasn’t going down very fast. And he began getting worried. He started putting all of his allowance toward the loan and it still wasn’t going down very fast. So he focused on paying off that loan and getting rid of that terrible interest payment. From then on he avoided interest payments. He’s in his 20’s now and still avoids interest payments if at all possible. So I guess he learned the lesson well. Interestingly, I came across the loan agreement we had drawn up on my computer years later and showed it to him and he was amazed at how low the interest rate was that I was charging him. He had convinced himself that it was some exorbitant rate. (So you might want to keep the agreement to show them later.)

A New Car

Another great way to show older kids the value of money, is to show them how it works in your life. A great way to do that is by involving them in the purchase of new car. Tell them you are thinking  about getting a new car. Ask them what features they would like, such as whether the car has a built-in DVD player or just has fancy new cup holders (kids think everything is cool) get them excited by letting them know what the new car is going to do for them.

After that, let them know what your budget is and let them help you research reliability, recommendations from places like Consumer Reports and Kelly’s Blue Book. Show them how to become an educated buyer.  If you don’t know you can use this as an opportunity to learn together. (see video above for some great tips and being an educated car buyer).

You can also use this as an opportunity to reinforce the bicycle lesson by paying cash for you vehicle. If you plan to use credit, be sure to study the breakdown of interest and principal for each payment. For instance if you borrowed $20,000 for 5 years at 5 ½% interest the table for the first year would look something like this:

No. Payment
Interest Rate %  Interest
Due $
Due $
Paid $
1 11/28/2017 5.500% 91.67 382.02 290.35 19,709.65
2 12/28/2017 5.500% 90.34 382.02 291.68 19,417.97
3 1/28/2018 5.500% 89.00 382.02 293.02 19,124.95
4 2/28/2018 5.500% 87.66 382.02 294.36 18,830.59
5 3/28/2018 5.500% 86.31 382.02 295.71 18,534.88
6 4/28/2018 5.500% 84.95 382.02 297.07 18,237.81
7 5/28/2018 5.500% 83.59 382.02 298.43 17,939.38
8 6/28/2018 5.500% 82.22 382.02 299.80 17,639.58
9 7/28/2018 5.500% 80.85 382.02 301.17 17,338.41
10 8/28/2018 5.500% 79.47 382.02 302.55 17,035.86
11 9/28/2018 5.500% 78.08 382.02 303.94 16,731.92
12 10/28/2018 5.500% 76.69 382.02 305.33 16,426.59

Show them that on your first payment of $382.02, a full $91.67 or 24% goes toward interest! Say, “Because the payment stays the same, as the principal balance goes down the percentage that goes toward interest goes down as well.”

Fix Your Old Car

Sometimes a new car just isn’t in the budget. You can teach your kids the value of money by fixing your old car. By fixing it you extend its life and you reduce your cost per year of ownership. Some replacement parts (like those that wear out) you will want to buy new, like spark plugs, windshield wipers, battery, brake pads, etc. But sometimes parts that don’t generally wear out get damaged such as a broken taillight lens, dented fender, etc. can be purchased used at a much cheaper price than new. Most “Junk Yards” buy used vehicles and then sell them for parts. They will remove the parts for you and sell them to you used. However,  some companies, like U Pull & Pay, allow you to remove the parts yourself thus you see how they come off and that makes it easier to put them back on your own vehicle. Often it is best to remove the old part from your vehicle first so you know what tools you will need to bring and then you practice removing it from the junked vehicle and you’re an expert by the time you have to put the new (unbroken) one on your vehicle. In addition since they aren’t paying for a mechanic to remove the part they often charge half of what the typical junk yard would charge. This can be a great father/son project not only learning how to save money but how to fix the car at the same time. If you have any questions about how to remove and reinstall the parts YouTube is a great resource for videos showing how it is done.

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About Tim McMahon

Work by editor and author, Tim McMahon, has been featured in Bloomberg, CBS News, Wall Street Journal, Christian Science Monitor, Forbes, Washington Post, Drudge Report, The Atlantic, Business Insider, American Thinker, Lew Rockwell, Huffington Post, Rolling Stone, Oakland Press, Free Republic, Education World, Realty Trac, Reason, Coin News, and Council for Economic Education. Connect with Tim on Google+