How to Financially Educate Your Children
You have the power to create and mold your child’s financial imprint. It is through your own actions, discussions, and attitudes towards money that your children will develop habits — both good and bad — that will carry them through and last a lifetime. They won’t learn it from anybody else; finances are not taught (at least not thoroughly enough if at all) in schools, and nobody else is going to show them how to succeed in life and avoid the huge financial pitfalls that lurk around every corner.
So do your child a favor and give them a huge helping hand! Here are a few ways you can help them create a healthy relationship with money:
1. Don’t Bribe Them With Money
By offering money as a reward for good behavior, your kids will learn that money is an end, instead of a means to an end. Try rewarding them with tangible life-enhancing experiences which the money would buy, like taking them to the movies, or out for a family lunch. Better yet, you can reward good behavior with things that don’t require money like having a sleepover with friends.
2. Go With the Flow
If your child wants to count the coins in your purse, let them. Use the opportunity to help them understand what each coin is worth and their relative value. You may even help them identify what each coin can buy (if anything). If they receive birthday money, then talk about the benefits of opening a bank account. As money works its way into your child’s life (and it will), use the opportunity to talk to them about it.
3. Allowances: Stick to the Plan
If you give your child an allowance, be exact and consistent with the amount and timing of each payment. This will get them used to timing and managing their income stream, as they will need to do when they later have jobs and careers.
4. Allowances and Pocket Money: Pay Yourself First
The best way to get your kids into the habit of paying themselves first is by doing it right from the beginning. Discuss long-term and short-term savings, and encourage them to put at least 10% of their allowance either in a bank account or even a piggy bank. The piggy bank option will require additional discipline (on their part) not to delve into it for candy, and could go two ways. On one hand, irresponsibly accessing their long term savings (maybe they are saving up for a video game) may affect their ability to reach their goals; a great lesson to learn — the hard way — early on in life. Then again, using a bank account instead may take just enough of the impulse urges out of their hands to help them achieve their goals and feel the satisfaction of getting that video game after saving up for it.
5. Put a Positive Spin on It
Even if you don’t have a positive attitude towards your own money matters, don’t allow your children to inherit this unhealthy disposition. Don’t let them associate money with anxiety or stress. Instead, teach them practically how money can help achieve their goals and get the most out of life through avenues like creating financial independence, creating a better world with charitable contributions, and even giving it to loved ones. Again try to stay away from the idea that money is an end or is happiness in and of itself; instead show how money can be a conduit to positive things.
6. Talk About It, Lots!
Money is not a taboo subject, even though we may have been raised to believe it is. If you aren’t comfortable telling them how much money you personally have in the bank (either because you believe you are not a shining example or because you simply don’t want to), then that’s okay. But when your child asks why you can’t go to Disney World, this is an opportunity to discuss the household’s budget, the cost of living, vacations, and entertainment. Involve them in the family finances, and they will learn to take ownership naturally — a skill that will take them through life.
Involving your kids in the family budget when they are only three years old may be a bit of a stretch. Instead, consider these money milestones as a way of incorporating finance education seamlessly into their lives.
When your kids start to become curious about pretty coins and money in general, educate them as to the value of coins and what they can buy. It also makes a great lesson in math: start with pennies as building blocks, then introduce higher value coins as their numerical repertoire increases.
As soon as pocket money and birthday gifts start adding up, take them into the bank to open an account. There are lots of child-friendly accounts out there, so make sure you actively involve them in the process. They will derive great pride from having their own account. This is when you start to discuss the concept of earning interest on savings.
Now that they have a bank account and the ability to save up for things, it is time to start budgeting. If they receive an allowance, hopefully they are already paying themselves first and putting away at least 10%, as with money received as gifts.
They are also probably talking about toys they want (like video games). So help them budget for it! With pen and paper in hand, help them construct a budget by determining how much their toy costs, figuring out how much they currently have, and calculating how long it will take them to save up for it. Seeing the plan on paper may encourage them to save more than just 10% towards their goals, depending on how motivated they are. Again, this is a great exercise in applicable math.
Let’s say your child is now motivated by their budgeting goals, and eager to reach them sooner. You could consider paying them extra pocket money for additional chores performed (they call this “overtime” in the working world, and it is outsourcing for you!), or help them if they want to earn money entrepreneurially. Teach them good business principles if they come to you wanting to open a lemonade stand, and help them to launch their enterprise successfully, starting with a solid business plan.
As your child continues to understand and appreciate the delayed gratification of saving and budgeting, and has a good handle on the interest their bank account earns, they may be ready for something more. Talking about various investments is the next step. A small lesson in big business and stock investments could turn into a game, as they follow the share price of companies they are familiar with, like Coca-Cola, or Disney.
Although having them invest their hard-earned pennies in the stock market is not recommended just yet, you could set up a mock investment account, and get them to follow the value of their money along with the stock (again, a great lesson in applicable math). Even if they forget about it for a while, a reminder a year or so down the road that they had “money” invested and what it is now worth may lead to a pleasant surprise about market growth; or conversely a rude awakening about market downturns.
As your child gets a good grasp on the above financial matters (they will likely be in their teenage years by now), it is time to involve them actively in the family budgeting and finances. Help them to understand what their own short term and long term goals are, such as the cost of higher education (even if you plan to pay for it), and eventually getting a car (or conversely what their alternative transportation options and costs would be), housing, and the cost of getting set up comfortably to live on their own (and hopefully, before the age of 35)!
When it comes to family vacations, involve them actively in the process, by working out with them the cost of various vacation options and funds available, and then decide together what the family would most enjoy doing. Budget together for excursions and souvenirs, and your kids will take ownership of the trip and learn to appreciate the experience so much more. Not only that, but they will be much less likely to try to guilt you into unreasonable expenditures since they already know what the budget is; they may even help other family members to stay on track!
You may not see yourself as the world’s best financial example. But this is no reason to sit back on your haunches and do nothing; in fact this will only increase the chances exponentially that your kids will follow suit! Instead, be prepared to come clean with your own mistakes, and celebrate your victories, in order to help your kids learn from you and start their own financial lives on the right foot.