At some point in their adult lives, often when they were just beginning, many parents had to learn the dire consequences of being poor money management. This could be the month in which you are late in paying your rent or the time you overdue your credit card debt. If you want your children to avoid those same pitfalls, you need to start teaching financial literacy sooner rather than later.
Research, including the influential work of David Whitebread and Sue Bingham of the University of Cambridge, suggests that many of our financial habits are set at age 7. If good habits are not formed early, it becomes increasingly difficult to steer your offspring in the right direction.
So how do parents teach dollar value and other key financial lessons? Here are some basic steps you can take right away to get them on the right track.
Key to take away
- If children earn an allowance through household chores, it can help them build the independence they will need later in life.
- Opening a child-friendly savings account or debit card teaches the value of savings and provides an introduction to the banking system.
- Allowing your children to observe budget discussions can help them learn how to spend responsibly and reach common solutions.
Let them earn a supplement
Regardless of their age, one of the most important lessons you can instill in children is that money is a limited resource. When they have to work for their money – as you probably do – they will learn to use it more carefully.
Many parents have a habit of providing their children with a weekly allowance, which in itself can help teach budget skills. It would be even better to make them earn that money by doing household chores. Withdrawing the mental connection between income and personal effort will be something that will bring big dividends when they grow up and fly.
These days, you don’t need a big bundle of money in your wallet to make up for the strange things they do around the house. Applications like BusyKid allows you to assign a dollar amount to each task, which adds to their total allowance.
Encourage part-time gigs
High school can be a lot of work for adolescents, as homework and extracurricular activities eat up a significant portion of their week. Still, if I can only set aside a few hours to work in a coffee shop or retail store, they’ll probably be better off for it. First, they will be less inclined to spend their money on frivolous things when they have to work hard for it.
You don’t have to wait until they get old enough for formal employment. You may find that your high school or early high school student can earn a few extra dollars by mowing the lawn or walking a neighbor’s dog. Websites like Nextdoor and even homeowners association newsletters can be an effective way to connect with locals who need a little help.
The moment they start earning real wages, so can you help them open up to the Roth IRA with some of their earnings. If you can, consider providing help with the right money. This is another life lesson that you can help them learn early. And it’s a good opportunity to present the concept time value of money.
Let them contribute to the purchase
Almost every parent knows what it’s like to take their kids to the store and be overwhelmed by requests for a variety of toys or video games. Maybe that shouldn’t come as a surprise. Younger children, in particular, still don’t understand that you have so much money each month to put on discretionary purchases.
One way to grasp the point is to get them to contribute to these unimportant items. If it’s not their birthday or Christmas, tell them they have to pay half the cost for a new Lego set or American Girl accessory. Your kids will better understand how much things actually cost, which is important. They will also learn that they need to save a surcharge for larger purchases and that they need to set priorities, just like you.
Let it be a game
Who said learning about finances had to be boring? Even board games can help children learn the importance of frugality.
Payday is one of the best for teaching children valuable money management skills. With the next salary after a month, players must keep their money. They can buy items that they think will bring them earnings and even raise loans, but going over their heads can create problems, especially when there are other bills to pay. Sounds familiar?
Even Monopoly can give some pretty important lessons, and participants choose which properties or buying strategies will bring the most payoff and measure the risk in relation to the reward with each move.
Open a bank account
An honorable piggy bank is a useful savings tool for younger children, but when they head to primary school, consider opening a children’s account at a real bank. It’s a good way to instill the importance of gradually balancing and giving them an introduction to the banking industry to get started.
A more modern approach is to get your child preteen a child-friendly debit card, like the one offered by Greenlight and GoHenry. Kids can make money through housework or pocket money and then use cards to shop online or at the store. They will soon realize how quickly their account balance decreases when they overdo it. Both products place an emphasis on transparency, giving parents the ability to control where children can use their card and send notifications after each purchase.
Start them with stocks
One of the keys to long-term financial health is knowing how to invest wisely stocks i bonds. If your children can learn some of these tools long before they start their first full-time job, all the better.
One way to do this is to open a small one custody account ua mediation for which they help them direct their investments. There is nothing like a first-hand experience to teach them about the volatility of different investments and the need for long-term prospects. Eventually, those assets will fall under their control when they reach adulthood.
Conveniently, apps like the aforementioned BusyKid allow kids to buy shares of companies, like Disney and Netflix, directly from their bank account, making it easy to become a stock exchange participant.
Have honest conversations about money
Perhaps the most important thing you can do to improve your child’s financial literacy is to be open and honest about your family’s finances. Parents often worry that too much honesty will only lead to worries, especially if they are going through job loss or other stressors.
The reality is that your children will face their own difficulties somewhere. They will be immensely better equipped to handle them if they know how to respond. This does not mean that you need to share your bank statements, but it may be helpful to discuss the need to stick to your budget and reduce certain unimportant things during weight loss.
Children are usually much more perceptive than parents think. If they see you making sensible decisions, they are likely to imitate those behaviors later in life.
The bottom line
Good money habits are not created out of thin air – they need to be learned. Starting with their children while they are still young, they will be better trained to manage their finances in adulthood, when it comes to a lot more.