In school, children may learn that the United States has a capitalist economy. They also may learn about historic events such as the Great Depression, but until they take a course in economics in college or their senior year in high school, they don't usually learn a lot about how the economy operates.
You might be asking yourself why kids need to know this. Good question. Economics sounds like a dreary academic activity, but it's not just for textbooks. Knowing about economics helps children to understand how things work. Kids are dealing with economic factors every day, even if they don't know it. When you start filling them in on some important financial issues, you might be surprised at the outcomes:
- Things that may make no sense to kids begin to come into focus, such as why a toy with a sale tag of $10 costs $10.80 when sales tax is applied at the checkout line.
- News reports they read about or hear on such topics as inflation and the price of crude oil start to make sense. A teenager will be able to understand why filling up the gas tank in the family car can vary from week to week.
- Taxes, a subject children may hear about in the news or when you're at the dinner table, are confusing to everyone. But children may already be paying taxes—on things they buy or on wages they earn. You don't have to be a tax expert to share what the different taxes are all about and how they can impact your child.
Grandparents can remember that a nickel used to buy a subway ride, a movie ticket, a pay telephone call, or a hot dog. Tell this to your child today, and he'd probably laugh. So what makes the same nickel subway ride of yesterday cost $1.50 today? A part of the explanation is inflation.
Why should kids be concerned with inflation? It can directly affect their buying power. Let's say your child receives a $10 allowance. If inflation is just 3 percent, then after one year your child would need $10.30 to buy the same things that her $10 allowance had in the previous year. It's not that she'd have to present $10.30 for an item marked $10; rather, the price of that $10 item may be increased for inflation, showing a price tag of $10.30. Kids have seen the price of a movie ticket jump from $6 to $7.50, and this increase can be explained in part by inflation.
If your child is a teenager and has a job, understanding inflation will put any salary increases in perspective. He'll want his wages to increase more than the rate of inflation so that the increase isn't just keeping pace with inflation; he'll want to make sure he's getting a real raise.
Other Economic Forces
Plenty of other technical terminology is bantered about these days when it comes to the economy. News radio reports may talk about economic forces every 10 or 20 minutes. Here are just some of the more common things your child may be exposed to and may want to know more about.
- Unemployment figures. Each month, the news reports on how many people are out of work and looking for jobs. You also hear reports about corporate layoffs and job creations. Unemployment figures can help explain to a 10-year old why his mother is out of a job, like so many other people. It's also useful for a job-hunting teenager to know whether unemployment is high or low. When she's looking for a summer job, low unemployment numbers means that job openings are abundant. If the unemployment rate is high, however, she should anticipate a lengthier job search and may have to settle for lower wages. Today, despite corporate layoffs, the economy continues to experience job creation, translating into more job openings than ever.
- Interest rates. You can't listen to a news report without hearing talk about interest rates, whether they're up or down. Children aren't interested in these rates because they primarily help you, the parent, in instances such as getting a lower-rate mortgage on your home. But younger children should know about interest rates because these rates affect how they save their money and what they can expect to earn. Older children with bank accounts of their own will see how changes in interest rates affect what they earn on their savings. Teenagers with credit cards also may feel the effects of changing interest rates if they're paying finance charges on unpaid credit card balances.
- The Dow. As with interest rates, daily reports on where the Dow is at can't be avoided. Again, knowing about this benchmark can spark your child's interest in investing in the stock market. Middle school- and high school-age kids might play at investments by tracking real stocks without putting in any real money. Some may even become interested in becoming actual investors.
Economic Terms To Teach Your Teenagers
Below are a few terms and factors that you can explain to your child as a base for understand how the economy works.
- Unemployment rate. This term probably comes up on the news and they explain what the employment rate if for a period. When teaching kids about money, we must educate them of this factor as it affects all families. When parents are unemployed, it means that no money is coming into the family. This means cutting costs where needed until the parents get another job. So if the say the unemployment rate is 5%, tell them that 1 in 20 families do not have any money coming in. Teaching children about money means educating them in simple terms,
- Inflation. Every year the inflation usually increases. A table for example that costs $50 ten years ago, may cost $80 today. So if the inflation rate is 3% for example, something that costs $10 this year will cost $10.30 next year. This is all due to the general rise in the level of prices. It usually depends on various factors within the economy that contributes to the rise of inflation. So when we teach kids about money and saving, inform them that what something costs this year, may increase next year due to the value of money decreasing.
- Taxes. The government taxes people’s incomes, goods and services, and from other sources as well. Why do they do this? This is so they can use this money to simply run a state or country properly by building infrastructure such as roads and hospitals. When teaching kids about money, this is an important factor to teach. We pay taxes in everything we earn and spend on. As they say there are two certainties in live, death and taxes.
- Interest rates. These may not mean anything to your children, but it means a whole lot to adults who own a mortgage for example. When we are teaching children about money, we can simply explain to them every time they say the interest rates are going up, it means the family has to pay more in repayments for the mortgage. It also affects savings account where if the interest rate increases, it means the interest they receive back is more as well. When we teach kids about money here, they need to learn that interest rates are a part of our economy and it comes from various economic factors that will result if the interest rate increase or decreases.
To give your child a basis of learning how the economy works is important. This will impact their current and future years and can either increase or decreasing their savings.
Capitate Your Kids: Give Your Kids a Financial Head Start
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