Teaching Kids About Money
It’s great that schools are now emphasizing the need to teach financial literacy in the classroom but the issue is training teachers. The problem is that most adults don’t understand the basics of financial investing, yet they overestimate their knowledge. Here’s a way to test your financial investment acumen from The Wall Street Journal:
Question 1: Buying a single company’s stock usually provides a safer return than a stock mutual fund.
TRUE or FALSE
Question 2: If interest rates rise, what will typically happen to bond prices?
a) rise b) fall c) stay the same d) There is no relationship
How did you do?
Question 1: Only 6% of those who took the survey got the answer wrong, choosing “True.” But fully 40% said they didn’t know the answer, and 1% declined to answer.
For those who want to know how many: 90% of the maximum benefit of diversification is derived from portfolios of 12 to 18 stocks. From Morningstar.
Question 2: Just 28% answered correctly (they will fall). More than one-third of respondents—37%—said they didn’t know; 18% said bond prices would rise if interest rates rise; 10% said there is no relationship between bond prices and interest rates; 5% said bond prices would stay the same; and a reluctant 2% said they preferred not to answer.
For those who want to know more:
An easy way to grasp why bond prices move opposite to interest rates is to consider zero-coupon bonds, which don’t pay coupons but derive their value from the difference between the purchase price and the par value paid at maturity.
For instance, if a zero-coupon bond is trading at $950 and has a par value of $1,000 (paid at maturity in one year), the bond’s rate of return at the present time is approximately 5.26% ((1000-950) / 950 = 5.26%).
For a person to pay $950 for this bond, he or she must be happy with receiving a 5.26% return. But his or her satisfaction with this return depends on what else is happening in the bond market. Bond investors, like all investors, typically try to get the best return possible. If current interest rates were to rise, giving newly issued bonds a yield of 10%, then the zero-coupon bond yielding 5.26% would not only be less attractive, it wouldn’t be in demand at all. Who wants a 5.26% yield when they can get 10%? To attract demand, the price of the pre-existing zero-coupon bond would have to decrease enough to match the same return yielded by prevailing interest rates. In this instance, the bond’s price would drop from $950 (which gives a 5.26% yield) to $909 (which gives a 10% yield). From Investopedia.
Confession: I have an MBA and still get confused on the relationship between bonds and interest rates!
So, how do we teach our kids personal finance literacy? I think the answer begins with the concept of Save/Spend/Donate. Still, this is not so easy to do. I helped my kids set up savings accounts a few years ago but since I didn’t let them spend the money in their savings account, they viewed it as a black hole and refused to make deposits. They simply had no motivation to save until I added savings deposit matching in which I match, dollar for dollar, ever dollar saved. You can’t take the money out, though, because then I would be teaching them arbitrage!
The result? My best saver takes advantage of cash matching to her savings account which has cost me a lot of money but my other two kids are still not motivated. They excel at Spend. Not good!
In order to give my kids money to work with, we have instituted a chore/allowance system which works reasonably well. They get paid their age. For example, my 12-year-old earns $12/week for doing her chore which is loading the dishwasher. She is also expected to: put away her clean laundry, clear her plate and take to kitchen, practice flute, clean her room, and help with laundry without compensation. This is not an ideal correlation of chores to allowance but the default of lacking an easy tracking mechanism.
One option is My Job Chart, an online tracking system that kids manage themselves to earn points from doing chores that converts to money. They can then spend the money at Amazon (parents approve purchase) or donate to a worthy cause which they can choose from the site. In order to get them to save, I’d also let my kids convert points to money which they can put into their savings account along with the cash match.
How do you handle chores/allowance/personal finance with your kids?
This is a sponsored post for My Job Chart. My opinions are my own.