The Right (and Wrong) Ways to Teach Kids About Money
If you have young children, you know that the responsibility comes with many rewards, but perhaps just as many challenges. We want them to grow up to be happy, successful, and we hope, financially independent adults. But, this can be quite difficult for parents on many levels, especially when discussing money. Many parents say it’s just as scary as talking about sex! Whoa. But, while most schools at least broach the topic of sex, many still do not have curriculum that covers personal finance topics such as budgeting, saving, and managing debt. I am willing to bet that you never learned these subjects in school either. So then how do they learn? Ideally, you would talk about it openly together, but without a deliberate effort, they most likely will turn to their friends or browse the Internet and social media. And without any filter for this wave of misinformation, it may turn into trial and error as an adult.
So, how can we teach our kids about money if school, television, and social media are no help? The good news is, you don’t have to be a financial expert! But, there are some right and wrong ways to go about it. The earlier you start, the better off your child will be and less likely to be influenced in the wrong way later in life. One of the best gifts you can give your child is the ability to manage money responsibly because whether we like it or not, finance is the cornerstone of our well-being. Financially-savvy children will save themselves (and probably you) a lot of unnecessary and avoidable stress in the future.
Set An Example
“Do as I say, not as I do” will not work here. Does it work anywhere, really? When I first speak with potential clients, one question I ask is, “how has your experience growing up influenced how you make financial decisions today?” And most times, what their parents did followed them into adulthood. You cannot teach your children good money habits if they see you fighting with your significant other over the credit card statement, being secretive or never talking about money (taboo), or spending recklessly like no one is watching when you (and probably even your child) know you can’t afford it. Instead, be open about how and why you are saving for retirement, for a rainy day, or other goals. Share why you are making the decision to purchase the shirt that is on sale vs. the one that is full-priced. Explain why it is important to pay off your credit card each month (even if you aren’t quite there yet).
Discuss Wants vs. Needs
Your children need food, clothing, healthcare, a safe place to live, and a good education. Anything outside of that is a want. Period. Teach them this important lesson early. Ask the question when purchasing something: is this a want or a need? It will pay dividends in the future when your college student has maxed out her credit card on spas, restaurants, and concerts and now can’t pay the rent. Your child will also learn to appreciate going out to dinner as a treat or getting a gift outside of holidays and birthdays rather than expecting it or it becoming the norm.
Give Them an Allowance
But (a big BUT), make sure there are strings attached, such as chores or a lesson on how to manage it. Having your child earn the money is probably the best way to teach her financial responsibility. If the chore is not completed, there is no money. Simple. But, don’t get crazy on payment. Doing the dishes is not worth $50 no matter how much disposable income you have. Be reasonable with the payment, but keep it substantial enough that the child wants to earn it. If you desire to give your child money without doing chores, that is okay, too, but do so with lessons attached. Start discussing budgeting, saving, and setting goals around how to handle it.
Make a Plan
I mentioned that you do not have to be a financial expert to teach your kids important money lessons. Here’s a simple formula to keep it simple, fun, and easy to remember. Pick percentages to assign to the following categories: Savings, Wants, Charities/Gifts. For example, 30% to Savings/Investing, 50% to Wants, 20% to Charity/Gifts. Then when you say, "I will give you $10 this week when you complete 'x'”, she divvies that money into buckets: $3 to Savings, $5 to Wants, and $2 to Charity/Gifts. Again, pick any percentage and perhaps involve your child in deciding this as well, but this could backfire, so tread with caution. This can work whether you pay in cash, open a bank account, or even use a budgeting app. You can use envelopes or piggy banks for cash and some banks allow you to create “buckets” where you can save towards different goals.
Speaking of goals, discuss each bucket and what it represents. Ask your child, “what do you want to save for?” “Do you like a particular charity or want to purchase a birthday gift for someone special?” Perhaps you can even pay some additional interest on the savings portion as not only an incentive for continuing to save, but a real-life lesson in compound interest and investment earnings.
Perhaps you have been trying to figure out a way to speak to your kids about money or maybe this is something you never thought of or even struggle with yourself. No matter your situation, I am a firm believer that all children should have a solid financial foundation before they make it to the “real world.” I do not think anyone would argue that point, yet most do not take the time to learn or teach their kids these vital lessons. Yes, it’s scary, but this is even scarier: leaving home, going to college, and starting your first full-time job not knowing the first thing about how to handle money. Meanwhile, “wants” turn into “needs” and all of your credit cards are suddenly maxed out and you have no clue on how to get out. Sound familiar? This happens all of the time and then gets compounded by student loans, car loans, and other debt.
The good news is, there are many resources out there, both in print and online. If you are unsure where to start, speak to a financial planner or hire one and start to set that example! Explain a want vs. a need and why you don’t “need” the latest iPhone or XBox. Make a plan around giving your children an allowance rather than letting them make the decision because we all know there’s only one category for them: 100% wants. Give them some incentive to save and set goals. Your kids will thank you later and most importantly, they won’t be calling you every month for a hand out.