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Beyond the Piggy Bank

How to leave a legacy of financial literacy to your kids and grandkids.

I guess I always thought my daughter would just absorb financial knowledge, especially because she was my daughter and that’s what I write about for a living. It wasn’t until she told me how excited she was that a friend had just explained compound interest to her that I realized I should have been a little more explicit.

My daughter and I had lots of talks about reproduction, politics and the issues of the day, but relatively few about money and how to manage it. Nor did that topic come up much in her school curriculum. I myself learned to manage money only as an adult, mostly when I began writing about financial matters. And I think that pattern is pretty much the national norm, which would explain why even many older people are financially illiterate.

For example, one study two years ago found that only 18 percent of 1,700 participants in their early 50s could correctly answer a question about compound interest. (The question was: If you have $200 in an account that pays 10 percent interest per year, how much would you have after two years? The answer is $242. The first year, the account earns $20 in interest. The second year, the account starts with $220, so it earns $22 in interest. But you knew that.)

The benefits of learning about money and passing that knowledge on to younger generations are obvious. None of us wants to have to support our aging parents or grown children because of their financial mistakes.

Of course, understanding financial matters takes a conscious effort, and your work won’t guarantee success. But without that knowledge, you’re a lot more likely to get into trouble.

Fortunately, there are easy and accessible ways to provide a basic financial education to yourself, your kids and grandkids.

There are plenty of resources online, some more inviting than others. I’m not sure, for instance, how many financial neophytes turning to to learn about financial planning are going to be tempted to solve the “Fed in Brief Crossword” puzzle to learn about the Federal Reserve system.

One online resource that I often recommend, though, is the Financial Industry Regulatory Authority’s site for investors, which delivers basic information in a readable format. Its section “Smart Saving for College,” for instance, answers questions about how much you need to save, various options for saving, and available tax breaks. It’s very readable, although its interactive features are limited to a few online tools.

Another website I’m excited about, LifeTuner, is a new venture by AARP designed to provide information about key financial decisions. It hasn’t been officially launched yet, but you can already take a look. It offers advice from certified financial planners and other experts, and there are tools that allow you to do things like calculate how long it will take to reach a financial goal at different savings rates. But the site is not a one-way conversation, and I found myself drawn into discussions on how much to spend on wedding gifts and how many credit cards you should have.

“Tomorrow comes sooner than you think,” it says on the home page, and some of us who are already at tomorrow are realizing now how we could have benefited if we had known more about finances earlier. Everyone should know how compound interest works, that it’s not good for your credit score to carry a lot of credit card debt, that it is good to put aside part of your earnings in a workplace retirement savings plan, and that it’s important to have your documents in order.

Which reminds me of a cartoon I saw recently. Perched in front of the entrance to a cave at the top of a mountain, a wise man is giving advice to a young traveler who has followed a trail marked “Wisdom of the Ages.”

“Get everything in writing,” the wise man says. “Otherwise you’ll end up broke and living in a cave on top of a *@#$^+% mountain.”

Martha M. Hamilton, formerly with the Washington Post, writes a regular column, Your Financial Future, for AARP Bulletin Today.

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