Most kids aren't being taught money basics in school. In fact, only 17 states require high school students to take a course in personal finance, according to the Council for Economic Education. So that means it's up to parents to teach kids how to be responsible with money.
It might seem like a daunting task to educate your kids about money — especially if you have trouble managing your finances. But you need to help them get on the right path so they don't end up with financial troubles down the road. Here are seven essential money concepts kids should know and how you can teach them.
The Concept of Money
Parents should introduce their kids to the concept of money when they're young — ideally before age 8, said Sam X Renick, creator of Sammy Rabbit, a financial education program for children. It's an integral part of life, so children need to understand its role.
"Money may not be everything, but almost everything has a relationship with money," Renick said.
Parents should teach children that money is a helpful tool that makes it easier to get what we need and want — now and later, Renick said. And it comes in different forms: coins, paper bills, paper checks, debit and credit cards.
Parents can teach young children about the different values of coins and paper bills by having kids sort and count them. They can help children learn how to use money by role playing and using games such as Monopoly, Renick said. You also can find songs and free downloadable activities to introduce basic money concepts to kids at SammyRabbit.com.
Parents need to be good role models when it comes to money. "Kids hear and see how parents talk, use and feel about money every day," Renick said. So your language and behavior should demonstrate a positive relationship with money.
The Value of Working for Money
Kids will quickly catch on that money can be used to buy things — even if you don't teach them this concept — because they will see you using it. So it's important that they learn from a young age that money doesn't magically appear. It must be earned.
It's especially important that children today learn the value of working for money.
"Many kids in the U.S. have more and are required to work less in their youth than in past generations," Renick said. As a result, they don't understand the value of work and are more likely to feel entitled. But they will need a strong work ethic if they want to be successful in life.
Parents should discuss the importance of working. But they need to give kids a chance to actually earn money.
"Give kids appropriate paid jobs in addition to expected household duties," Renick said. As they get a little older, encourage them to make money outside the home by caring for neighbors' pets or washing cars.
Keep Reading: Why I Pay My Kids an Allowance — And You Should, Too
The Importance of Saving and Sharing
If kids have money, they're likely going to want to spend it — and that's OK. But they need to be taught by the time they reach elementary school that it's not OK to spend all of their money.
"Since spending money comes naturally, they also need to learn about saving and sharing," said Steve Repak, a financial literacy speaker and author of "6 Week Money Challenge For Your Personal Finances."
You can help them learn these concepts by teaching them the 20-10-70 rule, he said.
- Save 20 percent — "This will teach them to always pay themselves first," Repak said.
- Give 10 percent — This teaches them the value of sharing and giving to others who are less fortunate or to causes they care about.
- Spend 70 percent — This teaches them to spend less than they earn, which is the cornerstone of personal finance, Repak said.
The Difference Between Needs and Wants
This lesson goes hand-in-hand with the previous lessons. But it takes on more urgency as kids gain more financial responsibilities when they become teens.
"Teens have a hard time distinguishing true needs from actual wants, and some adults have that same problem," Repak said. "For example, clothes are a need, but brand names are a want. Food is a need, but fast food or pizza is a want."
To help teens learn the difference between needs and wants, let them do their own clothes shopping. Determine a shopping budget and create of list of items they need to buy. Then drop them off at the mall with a Visa, MasterCard or American Express gift card that can be used in any store.
"Let them make the difficult decisions when it comes to limited resources and unlimited options," Repak said. "Your teen will either impress you with their ability to stretch a dollar, or you will have to make some exchanges. But either way, it's a real-life lesson."
How Credit Works
Just as your kids notice you're using money to buy things, they're also likely noticing that you're paying with plastic. But they won't know that a credit card isn't free money unless you take the time to explain you're borrowing money and have to pay it back.
Parents can tell kids that whenever they use a credit card or get a loan, the bank is providing money for the purchase. Then the bank will send a bill showing how much you owe. If you don't pay all of it, you will have to pay interest on the remaining balance. That interest can add up over time — so you end up paying more than the actual cost of the item you bought.
It's important for parents to teach kids that there are wise and unwise uses of credit, Repak said. "Buying things so you can feel good, impulse buying and spending for status are some of the unwise uses of credit," he said. "Paying for an education, purchasing a house, or starting a business could be examples of wise uses of credit."
Kids should understand how credit works before they get their first credit card. They should also be taught to spend only what they can afford to pay off each month so they don't end up in debt and don't kill their credit score.
The Benefits of Investing
Between the ages of 8 and 12, parents can introduce the concept of investing to their children, Renick said. It's important to teach them how they can benefit from it. "The money you make can make even more money than you earn if you invest it wisely," Renick said.
When teaching kids the basics of investing, parents should explain that it requires taking a risk with the expectation of achieving a return. "Greater rewards and returns require greater risk," Renick said. So it's important to discuss how much risk you should be willing to take when investing.
Parents also should explain that money invested can grow over time thanks to compound interest — which means that interest is paid on the amount invested plus the interest that grows on that investment. The earlier you start investing, the more time you give your money to grow and the more you'll have. Parents and children can open an investment account together — using some of the kids' money.
"You want kids to have skin in the game," Renick said. He suggested investing in an index fund, which tracks the performance of a major index such as the S&P 500. Research the stocks in the fund, review account statements and track the account's progress. For help explaining investing concepts to your kids, you could buy the book "TeenVestor" or visit TeenVestor.com for free resources.
The Concept of Net Worth
When your kids are teenagers, you can introduce the concept of net worth. In a nutshell, it's the difference between total assets — what is owned — and liabilities — what is owed. Kids need to understand net worth because it's a truer measure of financial health, Renick said.
For example, you could earn a lot of money. But if you also owed a lot of money, you could have a negative net worth. In other words, you wouldn't have financial freedom.
Parents can pull out a sheet of paper, draw a line down the middle and provide examples of assets and liabilities. Kids in college might already have assets of their own from a job and liabilities from credit card or student loan debt. So parents can have them list their assets on one side of the paper and liabilities on the other.
"Calculate the difference and write that number at the top of the paper," Renick said. "Circle it. Date it. Track it annually."
This exercise can help motivate your kids to boost their assets and pay down their debt so their net worth grows. Most importantly, as you teach your kids about money, remember that they won't learn these concepts overnight.
"Teaching children about money is an ongoing and never-ending process," Renick said.