Three Financial Topics to Discuss with Your Kids in 2024
A friend said to me recently, “I wish school taught me less about trigonometry and instead taught me what a mortgage is.” That got me thinking about how little we teach our kids about personal finance. With that in mind, here are three topics that I think are particularly relevant to discuss with kids in 2024.
How inflation impacts the amount of money one has to spend.
Hardly anyone born post-1980 talked about inflation until the pandemic hit. Then coronavirus lockdowns created drastic changes to our buying habits, which made the prices of certain in-demand goods skyrocket. Eventually, this led to a general rise in the inflation rate to as high as 9%.
But though inflation was rising nationally, the impact on individuals differed quite a lot depending on a person’s circumstances. A few examples will be helpful to understand this.
New car prices rose about 21% from the beginning of the pandemic until the end of 2023. For anyone buying a car, the jump in car prices was a huge added cost - thousands of dollars. But for those who did not need to buy a car, the impact of car inflation was much less significant.
Similarly, house prices also shot up during the pandemic, but for anyone who already owned a house with a fixed rate mortgage, monthly payments stayed the same, even as new home buyers were paying much more for similar homes.
Why should kids know this? The point is that while changes in the overall inflation rate are important, individuals should also pay close attention to the prices of what they personally spend most of their money on. If the price of your specific items goes up, you will have less leftover for other essentials. But if you are lucky and the prices of what you want or need are not rising, then the bite of inflation will be less detrimental.The connection between the Federal Reserve setting short term interest rates and mortgage rates.
The Federal Reserve (the Fed) does not directly control mortgage rates. But the interest rates banks charge for home mortgages are impacted by the short term interest rates set by the Fed. The Fed, as the central bank of the United States, oversees several short term interest rates and sets these rates based on its outlook for the U.S. economy. Every month or two the Fed meets to decide if rates should be changed or kept steady.
The most important rate the Fed controls is the federal funds rate. This is the rate banks earn on overnight lending to each other. Banks use this rate to help them decide what interest rates to charge to their customers for loans on homes, credit cards and cars. Since banks can borrow from each other at the federal funds rate, banks will almost always set the interest rate on their loans to customers higher than the federal funds rate, generating a profit for the bank. Accordingly, and this is the key point for kids to understand, the higher the federal funds rate, the higher the interest rates banks will charge for loans.
However, it is also important to know that changes to the federal funds rate do not go hand and hand with changes to mortgage loan rates (mortgage rates line-up better with the rate on 10-year Treasury bonds). But they do generally move in the same direction. So if the Fed is increasing the federal funds rate, mortgage rates are likely to rise. If the Fed is cutting the federal funds rate, mortgage rates will probably fall. And if the Fed isn’t making any changes, mortgage rates will probably not change drastically.
Why should kids know this? Loans fund the largest financial purchases in most people’s lives - homes, cars and college. Knowing what influences loan interest rates creates savvier consumers, as kids can understand how the Fed’s interest rate decisions are likely to make borrowing less or more attractive in the future.
Where to get useful information about personal finances (hint, it begins with a B and rhymes with cooks) and what sources to avoid.
Pediatricians recommend reading books to children starting from the time they are born. While a finance-related book for a newborn is probably a stretch, for an older child, there are actually some terrific books aimed at introducing key financial topics to kids. The books are written in easy to grasp language.
The problem is that few of us are aware of these books and so most children never get a chance to see them. As a parent, an act as simple as taking some books out of the library can be instrumental in helping set your child on the road to financial competence. Try browsing what is available at your library or request a specific title.
Personally, I think an excellent first book for kids ages 8 and up is:
Finance 101 for Kids: Money Lessons Children Cannot Afford to Miss by Walter Andal
What kids should avoid is getting the fundamentals of finance from randomly searching on social media sites, as it is very difficult to ascertain the quality or accuracy of any advice kids might receive from these sources. By introducing well researched, age appropriate finance books at an early age, parents can get the process started of kids thinking responsibly about how money impacts their lives. And as kids get older, parents can help kids find more advanced personal finance books.
Lastly: If you speak about these topics with your kids, please let me know how the conversation went. I will be sharing more pointers for talking to your kids about finance in future posts and I would love to include your insights as well.