An essential skill that should be taught to children is learning about money and how to manage it – in short, they should learn how to get money wise. In households where this skill is not taught, children grow up to have dysfunctional relationships with money, including becoming spendthrifts, misers, or going broke.
A lack of education about money can negatively impact their future. When growing up, children will inevitably learn about money—but will they learn by accident rather than by intention? A good education will help them think logically rather than emotionally about money. A solid foundation will help them make financial decisions based on common sense rather than irrational thoughts and feelings. While some schools may teach about the value of money, most do not. This puts the pressure on you, the parent, to supply your children with the right education about money concepts.
Educating your children about how to handle personal finance and what to do to manage money should be as important as anything else they need to learn to become sensible, well-balanced, and successful adults. Money management can be broken up into learning about the concepts of money, as well as learning about spending, saving, and investing. Besides theses skills, children should have a basic understanding of how to keep accurate records, how to make sound decisions, and how to avoid getting into debt.
1. Teach your kids about the concept of money
As soon as your children can learn how to count, they should be taught about money both by you personally and also by getting involved with places like the Children’s Financial Network and the Jump Start Coalition. By taking an active role in educating them, using observation and patient repetition of basic concepts, you can communicate the value of money, which includes how to earn, spend, save, and invest it. By teaching them the difference between wants and needs, you will create a distinction between intelligent spending and emotional spending. Finally, set small financial goals. For instance, if a child wants a toy, give them an allowance for chores that they can save toward buying the toy. Small goals teach about planned purchases as opposed to impulse buying.
2. Teach your kids about spending
You can transform your trips to the grocery store into educational lessons about how to spend wisely. These lessons can include how to select value for money, how to use coupons, and how to buy items on sale rather than at the regular price. You can even teach them how to compare unit prices on items at the grocery store, compare car insurance rates from many insurance companies, and compare prices on that new big screen TV.
These lessons can be extended outside of the shopping experience into the kitchen. Teach your children how to only buy what you have room to store, how to plan an economical meal, how to avoid wasting food, and how to deal with leftovers. Once they feel comfortable with how to do grocery shopping, introduce them to other types of stores, where they can learn about value comparisons, deciding on whether a product is durable or will quickly become obsolete, how to return products that have manufacturing defects, and about how warranties work.
The main purpose of these lessons is to teach the difference between value and buying and between a planned purchase and an impulse purchase. It is also about learning the difference between spending and overspending, and between being thrifty and miserly.
3. Teach your kids about saving
Once children have learned how to spend, it becomes much easier to teach them about saving. Here are some distinctions to teach about why savings are important:
- Savings can even out the supply of money in a person’s life. The supply of money is not always a constant. You can compare money to an ocean, and about how money ebbs and flows like the tides. Discuss how sometimes we can earn more than we anticipated and sometimes we have unexpected expenses.
- Savings can protect a person against future loss.
- Saving can prepare a person for future opportunities.
- Savings can also add up so that a person can make a big purchase of a valuable item.
- Savings earn interest on money. As soon as a child is old enough, it is essential that you teach them about the amazing power of compound interest. A child who truly understands this invaluable lesson can expect to be wealthy in adult years. (If $5 is saved a week at 6% interest that compounds quarterly, it will create $266 in a year, $1,503 in five years, $3,527 in ten years, and so on. Incidentally, the formula is M = P( 1 + i )n where M is the total amount with principal, P is the principal, i is the rate of interest, and n is the number of years of investment.)
- Savings will also lead to a good credit history. You can even encourage savings by creating a matching program. At periodic times of the year, you will match the amount a child has saved on their own.
When allocating children an allowance, give them the money in an even amount that will make it easy to save. If the allowance is $5, give them the money in $1 bills. They can then divide the money into two envelopes: one for spending, one for saving. This envelope system can evolve as the child grows up, with the spending being broken up into between different categories and the savings into short term and long term savings. Finally, when your children are old enough take them to a bank or a credit union to open up a savings account.
4. Teach your kids about investing
Investing is about using money to either increase education about how to make more money or buying assets that can earn money. Although this may be too advanced a lesson for children, with more theory than practical applications, you can initially teach it through instructions and personal examples of your own investments. The idea is to teach the difference between spending on a liability, something that costs money, and spending on an asset, something that will eventually earn money back. Understanding these distinctions will help a child to understand the difference between surviving and thriving in life.
5. Teach your kids about record keeping
Record keeping, tracking incoming and outgoing money, can initially be taught through the envelope system. The envelope system can be organized by categories or by time. In the category system, the envelopes can be divided between spending and savings, and then further divided into subcategories. In the time system, the envelopes can be broken up into weekly or monthly groups, where the child can organize their allowance. The envelope system can also be used for storing receipt. Later when the child is old enough, you can teach them how to organize everything by writing it down.
6. Teach your kids about decision making
Children will learn through practical experience about making good and bad decisions. You can also help them evaluate advertising in the form of print advertising and television commercials.
7. Teach your kids about avoiding debt
The best way to do this is to show them how you use your own credit cards. Teach them how borrowed money has interest attached to it that can quickly add up.
These are some of the simple ways to ensure that kids understand and implement money management right from the beginning.
Do you have more ways by which kids can become better at money management. Do share