Teaching Your Kids about Basic Economic Principles

We all want the best for our children. Some of the most important life lessons we can give our kids are lessons about money. Financial gurus agree that in order to develop a sense of financial responsibility in children they should be taught to understand how our economy works at the most basic level.

A good time to start teaching children about these concepts is when they are around seven years old. You can begin by talking about how cash and credit cards work. Explain that borrowing money to pay for something is what we do when we use a credit card.

Also explain that when we purchase by credit, the item purchased is far more expensive than it would have been had we paid for it in cash.

That’s a great send-off point to discuss the importance of operating your own household economic unit on a cash basis. Teach your child the benefits of buying only what can be paid for using the cash at hand. Then explain that credit cards have a role to play in our lives but only serve us well when we use them in a disciplined fashion.

Once you’ve covered how personal finances work, then start to discuss how the economy works. Explain how money is generated and help them to understand that through employment, investments, or business ownership people earn money.

Highlight how we are all interconnected. For example, you might explain that the couple that owns the local flower shop help to keep the people working in the greenhouse across town because they purchase flowers from the greenhouse that are then sold in their store. Then show how your family helps to keep the local flower shop open when you purchase flowers for your dining room, and so on.

When everyone does their job and purchases responsibly (utilizing more cash purchases than credit) we have a functioning economy. Teach your kids about the importance of saving as well as investing and how this helps individuals to develop their own cash economy. The more we earn, save and invest the more we will be able to buy on a cash basis and pay less for it at the same time.

One important lesson you can include about basic economic principles, like supply and demand, is to discuss things in terms of need rather want. Our economy is constantly adjusting to the demands of consumers, like Mom and Dad, by providing things on the market that are based on those demands.

The key lesson here is that on an individual basis we should be really looking at our purchases in terms of needs and wants. The market may seem to be saying that everyone wants the newest electronic gadget like an Apple iPad (a thin computer that resembles a slate, and that is used primarily for accessing the internet, not creating data).

The big question to ask is do I “need” it or do I just “want” it? Teach your children the difference between the two and explain that when trying to maintain a cash economy in the home it will be important to purchase based primarily on need and not want. Impulse purchases or buying things based on want and not need causes some people to use credit cards in an undisciplined fashion. This leads to unmanageable debt and the crash of your household economy.

Providing your children with real life examples is a great way to teach them about basic economic principles. Peace & Blessings! :-)