What to Teach Your Kids About the Economy
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:
Money ABCs
Inflation is an economic condition that results from an increase in the money supply. It causes the value of things to fall and the price of things to rise. At its most basic level, inflation boosts the cost of goods and services.
- 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.
Inflation
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.
Financial Building Blocks
Historically, inflation has averaged about 3 percent a year. In the past several years, we have been in a low inflation environment (less than 3 percent). This low inflation is expected to continue in the foreseeable future, but many still remember double-digit inflation in the 1970s and early 1980s.
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.
Money ABCs
The Dow is shorthand for the Dow Jones Industrial Average (DJIA), a composite of the prices of 30 stocks. The Dow is an index used to measure whether the stock market as a whole is up or down. The Dow is the most well-known average because it includes big companies that everybody knows, such as IBM, GM, and Kodak. But many other averages are around as well.
- 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.
Excerpted from The Complete Idiot's Guide to Money-Smart Kids © 1999 by Barbara Weltman. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.
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