How to manage money is one of the most valuable skills you can teach your kids. Unfortunately, money skills aren’t part of a child’s formal education so many children leave school without basic financial understanding – such as managing a bank account or how to responsibly use a credit card. It is really up to you to take the time to have these important conversations with your kids or they may end up receiving their financial education by learning things the hard way!
This financial education can start at a very young age. As early as the preschool years, your kids start picking up on your financial habits. They are very observant and may notice behaviors you are not aware of such as taking out a credit card every time you want to pay for something or regularly adding money to a coin jar. Today we’re going to take you through a series of tips that may help guide you through money management education:
Set An Example
Examine your attitudes about money, so that you can set a good example for your kids. Encourage open conversations about money management and do not hesitate to share stories about what money means to you, which could include how you started saving at a very young age or the sacrifices you made early on to have more later.
Give Your Kids An Allowance
Give your kids an allowance to reward them for doing specified chores around the house. If possible, consider giving them a “raise” or a “bonus” for a job well done or for going above and beyond your expectations. Not only does this help kids understand early on that money is earned, but it also teaches them the value of hard work.
Start Them Saving
Emphasize the importance of saving. Help them establish a savings jar or a process where they can regularly add to their allowance earnings. Don’t stop here. Check in with them every week, help them count their money, and show them how their savings grows as they add to their jar.
Teach Them About Value
Show them that the things they want cost money. When your kids are ready to buy something, take their money with them to the store, and have them physically hand their funds to the cashier. If they do not have enough money for a purchase they want to make at that time, help them come up with a plan and track their progress towards the savings goal and their purchase.
Encourage Them To Prioritize
Avoid giving them everything. As tempting as it may be, do not give in and buy your child everything that they want. By doing so, you are emphasizing the importance of prioritizing purchases and potentially waiting to spend the money only on the items they really want. Or make them choose one item from several things they may want. This will encourage them to make decisions and understand outcomes.
Shopping and Making Choices
Once your child has their mind set on something, take them shopping to look at the item at several different stores. Teach them how to compare prices and if there are similar less expensive choices available, help them evaluate whether this other choice presents a bargain opportunity. Also, help them evaluate choices based on its features and benefits. In other words, develop your child into a smart consumer.
Beyond the Piggy Bank
Once your child is a teenager, set up checking and savings accounts, explaining to them the features of each and how they work. Supervise their use of the accounts to ensure they are only using money they have. The savings account provides a great opportunity to teach your children about earning interest on money they save, and how this helps it grow faster. This is also the time you can provide a very valuable lesson – which is to “pay yourself first.” By shifting the money they want to save into the savings account as soon as they receive it, hopefully it becomes less of a temptation to pull it out to use on unnecessary spends.
Introduce Them To Credit and Loans
Teach them about responsible use of credit cards and loans and the pitfalls they can lead to if not managed correctly. As soon as your child steps on a college campus, they will be hit up for a credit card every direction they go. If they choose to get a credit card, it is important to educate them about interest rates on purchases, penalties if they do not pay on time, and how, if they start spending on what they cannot afford, the balances can very easily get out of control. On the other hand, it is equally as important that they understand how making timely payments on credit card balances builds credit and that credit score/standing will play an important role in goals they may have in the future, such as buying a car or getting a mortgage to purchase a home.
Teaching your kids to create a plan on how they will spend their money will help ensure that they have enough money to get the things they need. Not only will a budget help them not overspend and stay out of debt but keeping track of spending can also help them eliminate bad habits or regular spending on things they do not need, and potentially become better savers.
Establish an Emergency Fund
At one time or another, kids will discover over time that life does not always go according to plan. Teach them to establish a “rainy day” or “emergency” savings fund, so the unanticipated expenses do not cause unnecessary stress to have to access or borrow funds, sometimes under very unfavorable conditions to pay for them.
Investing – Risk vs. Reward
They will probably hear about terms such as the markets, stocks, and bonds, on the news, but demystifying and uncomplicating these terms can be a very valuable lesson. Take the time to explain basic investment terms, the risk and return present in investment-related vehicles, and show them resources where they can start their own investment plan. If you feel that you do not have the knowledge necessary in this area to help your kids, there are many investment professionals who would be very willing to provide them with investment education.
Working and Saving for Retirement
While retirement might feel like a long time from now for your kids, stress that there is life after work, and if they work hard and are disciplined savers, this can be a very content part of their life where they have a lot of time to spend on the things they enjoy most. Emphasize that the sooner they start saving to their retirement accounts, the better; and through this disciplined saving early on and the power of compounding returns, they will have a big head start compared to someone who delays saving until later in life for this all important goal.
By teaching your kids about money management, you will arm them with tools that will help them throughout their life. They can build on these lessons as they grow and establish a strong foundation.