When it comes to teaching your kids about money, think of it as teaching them survival skills. If you do not teach them about money–budgeting, saving, spending, and credit–it will be left to trial and error, which could prove costly and time-consuming.
Since only about 15% of young people learn personal money management in school, take this opportunity to be the primary educator for your children’s financial foundation.
Teach by example, with age-appropriate themes that cover four practical topics: budgeting, saving, spending, and credit.
Unfortunately, basic budgeting is not taught in schools, and kids need to have a plan for their money. When your child has learned to multiply, it’s time to explain the basics of interest. Keep a jar in the kitchen, and as the jar fills with loose change, children learn the first steps towards savings. Spending strategies such as comparison shopping for prices and quality and a discussion of wants versus needs is important. Our desires are unlimited, but our money is not.
Explain that credit is not free money; it may get us things faster, but we may end up paying more over a long period of time. Our handling of credit obligations, good or bad, is reflected in a credit report that many businesses, lenders, and employers view. Misuse of credit may affect our future ability to have a place to live, work, or borrow additional money.
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In addition, children need to develop strong values and morals about what money is and isn’t. Money is not taboo, evil or dirty, nor is it a measure of personal worth. Kids should never get the idea that the more money you have, the worthier a person you are. Money is merely a ‘medium of exchange’ for goods and services.
Saving and setting goals for large purchases builds self-discipline as opposed to immediate gratification. Kids might not understand what an Annual Percentage Rate is, but somewhere along the road, they need to learn that it is a good idea to repay a loan based on the terms. Help them to understand the importance of repaying a debt; when you borrow money, you promise to repay it. You want to make good on your promise and build a strong credit history.
How Do You Teach Your Children About Money?
You are the first – and best – teacher for money management. If you don’t instill positive money management values in your children, others will (peers and advertisers), and it will be left to trial and error. Children follow our guidance until about age 10, and then they start looking to their peers.
Without even thinking about it, every day, you are teaching money skills by example, through your actions and communications. What you say is not merely as important as what you do. You might want to examine your own money habits and attitudes with the questions below to uncover the message you are sending to your children about money:
- Is your approach to financial matters calm and rational?
- Do you argue about money? Neglect savings? Live from paycheck to paycheck?
- Do you feel guilty about money? Anxious? Afraid?
- Do you need money to feel ‘good enough’?
- Is money a way to express love, anger, guilt, power?
- Do you overspend? Do you often buy on impulse?
- Is shopping a pastime or a cure for depression?
- Is money the goal or a tool to meet goals?
- Do you pay bills on time?
- Do you believe in sharing with the less fortunate?
3 Steps To Help Your Child Learn Proper Money Management –
Even the very youngest children are immediately attracted to the jingle of coins and the glint of silver when first they see it. This is a clue for parents to begin to organize their thoughts on how to teach kids about money. It’s never too early to start!
Step One: Teach Your Child How to Save –
If there is one thing many parents seem reticent to do, it is teaching their child how to save their money. This could be because the parent isn’t the best at saving money themselves.
It isn’t only a matter of teaching them “how” to save, but it is also a matter of having them understand “why” saving money is so important. When a child understands why, suddenly how they save becomes far less challenging.
In today’s world where instant gratification is readily accepted, teaching a child why they must save may take a bit more work. In the past, a child was given a small allowance for performing chores. Most kids no longer work for an allowance. Thus, the focus of the reasons they need to save must be outlined for the long term.
Many families travel for vacations. This is an ideal way to help the child learn to save. Set a goal amount they may need for their personal vacation expenses. Helping a child keep track of how they spend their money is a large part of financial education.
The famous financier, J.P. Morgan, taught his son, J.P. Morgan, Jr., to keep track of every penny he spent in a little book. At the end of every day, J.P. Morgan reviewed what his son spent and discussed the value of what the boy spent his money on. J.P. Morgan’s son and grandsons carried on the financial empire their grandfather created to ultimate success.
Another reason to teach a child to track their spending and expenses is that it encourages in them the idea of monetary value. By the time your child enters pre-school, he/she should have explicit knowledge of the various types of currency. Parents of pre-school age children can make a game of teaching about currency to help the child realize the value of money in all its forms.
Step Two: Teach Your Child Money Restraints –
It is just as important to teach kids that money is not limitless, as it is to teach them money restraints. It’s never a good idea to allow a child to expect their parents to pay for things the child wants after all of the child’s allowance has been spent. That sets the example that they can spend money without concern for future expenses.
Ask the child to pay parents out of their allowances for small items such as special school supplies they want. By teaching the child proper money management techniques, they learn money isn’t only something they receive, but also something they must give away for things they need/want.
Having to pay out of their allowance or owing parents for items they need further impresses the child about the importance of saving money, budgeting, and the obligation to pay what they owe. This is good practice for when they get their very first credit card.
Step Three: Teach Your Child the Importance of Money Management –
As the child grows into a teen, there should be remedial efforts to reinforce earlier education about money. Teenagers are prone to peer pressure. They should be taught the pros and cons of loaning money to friends and how to protect themselves from unscrupulous financial transactions.
By the time they are teens, it is equally important to help them understand the concepts of good credit and the consequences of not saving money as a resource against unforeseen financial problems. They should not only know what an emergency savings fund is, but they should have one of their very own. Teens should also be exposed to those who can assist them should credit counseling become necessary when they are financially independent adults. Credit counseling can be a remarkable resource for college graduates who are about to start paying off their student loans and also dealing with any credit card debt they’ve managed to accumulate while they were a college student.
Money Education For Three To Five Year Olds:
Two books can be helpful at this age: ‘Pat the Cat’ by Edith Kunhardt and ‘The Berenstain Bears Get the Gimmies’ by Stan and Jan Berenstain.
‘Pat the Cat’ shows Mommy making a shopping list and sticking to it, and Daddy going to the bank machine, taking money out, putting it in his wallet, and then paying for the groceries. ‘The Berenstain Bears Get the Gimmies’ book shows Papa bear explaining that you can’t have everything you want all the time.
Explain how things are bought and sold. Money is a means of exchange for things like goods and services. We interchange money for things, and we can only use it once, then it’s gone. Let them shop with a small amount of money at the dollar store so they can see the entire purchase transaction from start to finish.
Discuss that bigger is not necessarily better. This will be a challenge. Use a nickel to show and explain that it is less money than a dime even though it is bigger. Start going over what coins and dollar bills look like.
Money Education For Six To Seven Year Olds:
Television ads and the magic of persuasion becomes an issue. It is an excellent time to talk with your kids about advertising versus what an item can really do. Also, it is a good time to introduce the allowance and savings strategies.
For savings, give your child three banks (jars) labeled with the following: Spending, Saving, and Sharing. This will start them thinking about planning and spending their money. You can even tape a picture to the jar of something specific they are saving for such as a truck or doll.
Since most children will get money out of their parents anyhow, now is a good age to introduce an allowance. Start with a $1 or so given every week. Show that a $1 is equal to ten dimes or four quarters. Some parents give money equal to the child’s age, and others use half of the child’s age. Be consistent and pay at the same time every week. At this age, the amount should be weekly. Keep the amount reasonable, too. Overdoing it gives the impression that things come easy and under-doing it gives the impression that things come too hard. Clearly explain what they are expected to pay for with their allowance money. What you expect them to pay for out of their allowance will ultimately affect the amount given.
There are two schools of thought on allowances: payment for work performed or payment unconditionally.
The first approach, payment for work, can be a source of conflict and power struggles. The child may say: ‘I am not making my bed anymore because I don’t want an allowance.’ Plus, this method may undercut the moral concept that a family is a unit where each member contributes and works.
The second approach, payment unconditionally, is recommended by most psychologists. The allowance is used as a money management tool, no strings attached. All family members are expected to do their share of work around the house – not tied to an allowance. Chores must be done as a part of family responsibilities.
You may also want to consider a combination of an unconditional allowance plus extra earnings for extra chores. This starts to give them the message that when we work, we can earn money. It helps set the foundation for a strong work ethic. Activities to encourage at this age include playing grocery store or fast food restaurant where a child can learn to make change.
Money Education For Eight To Ten Year Olds:
At this age, give annual raises for allowance and open a savings account. Give opportunities to earn extra money for extra chores. A visit to the workplace can open discussion on where the money comes from and how it is earned.
When they have a basic understanding of math, show your children how to comparison shop with these activities. While grocery shopping, ask your child if it is better to buy 24 plain popsicles for $3.99 or the fancy red, white, and blue ones that are 12 for $3.50? Also, have them scour the store and let them pick one item they really want. Consider letting them plan a lunch for their friends and help them pre-plan with a budget, shopping list, and trip to the grocery store. Explain how the family gives up some purchases in order to save for others. For example, you may have to cut back on eating out for dinner to save for a vacation.
Money Education For Eleven To Fourteen Year Olds:
At this age, give larger allowances less often. Double the amount and give it every two weeks instead of every week. This will help them plan and budget. Increase what they’re responsible for buying, too, and introduce the subject of investing.
Start to set short-term and long-term financial goals. Discuss saving for college or a first car. Consider matching amounts they contribute to savings to give an incentive to save. Explain the different ways to save, such as with a savings account or a CD (certificate of deposit). Include in your discussion how to calculate simple interest rates that may vary from bank to bank.
Have your children watched you pay bills? Make a pie chart showing where the household money goes, and include your children in your family budget talks. Tune into peer pressure and the desire for status purchases. At this age, your child is an ideal target for advertisers because they like new things. Talk with them about marketing and advertisements.
Money Education For Fifteen To Eighteen Year Olds:
At this age, your teen needs to become more sophisticated about handling their own money. This is the struggle for independence. Teach them valuable life skills.
Show them how to use a checking account and debit (ATM) card – making sure they record all transactions and fees. Have them balance their own checkbook and pay their own bounced check fees.
This is also the time to encourage them to get a part-time job. This is probably the best way to bring home the message about earning money and also the benefits of higher education. Minimum wage only stretches so far. You may want them to open their own checking account if they have a job.
Discuss credit with them in detail. Include topics of credit cards, hidden costs, and extra fees, credit reports, credit scores, and credit habits. Explain that credit is not free money; it may get us things faster, but we may end up paying more over a long period of time.
It is a good idea to let them feel comfortable with using a debit card first. Your teen will need to know the vital difference between what you have (debit card) versus what you borrow (credit card). Consider allowing them to use your credit card if they pay the bill in full every month. When your statement comes, take time to explain the statement with close attention being paid to the due date and limit.
Our handling of credit obligations, good or bad, is reflected in a credit report that many businesses, lenders, and employers view. Misuse of credit may affect our future ability to have a place to live, work, or borrow additional money.
Talk to your children about the future, whether it’s planning and saving for college or a new home. It helps children to know that you are holding off purchasing a new car because you need a new furnace for the winter, or that you are saving for the family vacation to Disney instead of using your credit card to finance it now. Setting goals, along with planning and saving, help make your vision a reality.
Starting money education early, providing regular advice and support, and helping a child formulate good money practices should be a goal for all parents. While much is written about managing personal finances for adults, a school age child can be introduced to books that reinforce what parents teach about money. Pick up some books today and read to your child. You can never start too early with children. They are like little information sponges and will soak up all the financial and money management advice you can give them!