Money (MP) Having financial skills is one of the more important skills to navigating life. Why, our education system isn’t teaching kids about money is not only surprising, it’s down right neglectful. If you want to make sure your kids grow up with good spending and saving habits, it is important to start early. As parents it’s up to us to make sure our kids have in place the financial skills necessary to be successful.
Most experts will agree that the critical age to begin teaching kids about money is 3 years old. Teaching your children about finance early will best prepare them for important decision-making opportunities. Educating, motivating, and empowering your kids to become regular savers will enable them to keep more of the money they earn and do more with the money they spend… like investing.
Teaching Kids About Money Made Simple
1. Talk about money with kids
As soon as children can count, introduce them to money and set up regularly scheduled family discussions. Take an active role in providing them with real money information. This is especially helpful to younger children and it can be the time when they learn about savings and interest. Help your kids define the differences between needs, wants, and wishes. This will prepare them for making good spending habits in the future. Share with them your values about money — how to save it and most importantly, how to spend wisely!
Other money topics should include the difference between cash, checks, and credit cards; how to avoid the use of credit; and the advantages of investing. With teenagers, it’s also useful to discuss what’s happening with the national or local economy, how to save money at home, and alternatives to spending money. Fugal living may come to be important as they take on more responsibility in their own financial life.
2. Lead by Example
Explain what you are doing when you write a check, use an ATM card, or pay for groceries. But, it’s from observation and repetition that children learn. Kids are very observant and will learn many of their money concepts by watching you and copying your behavior. If they watch you shop all the time, guess what kind of habit they’re picking up? That’s right, a bad one. Limit your spending habits that they may learn to limit theirs. Which bring me to our next technique…
3. Allowance and spending
Ideally, you should open your child’s bank account before you give them allowance. But in any event, when you start dispensing allowance your children, couple the activity with lecture on the importance of saving. If you don’t, your child may start to waste money early on frivolous things. More importantly, he/she will develop poor spending habits that will be hard to break as they grow up. When giving children an allowance, give them the money in denominations that urge saving. For example, start with $10 per week allowance, give them 10 – $1 dollar bills and instruct that five dollar be set aside in saving for college. (Saving $5 a week at 6 percent interest compounded quarterly will total about $266 after a year, $1,503 after 5 years, and $3,527 after 10 years!).
[hoot_box type=”flag” color=”green”]Note: The above $5 per week allowance example may work for elementary school aged children, but for older kids you might want to up the ante a bit. [/hoot_box]
4. Open a saving account
Take children to your bank or credit union to open their own savings accounts. Acquiring early regular savings habits is one of the keys to success with investing. You can also introduce children to U.S. savings bonds as a saving method. Bonds are a good value, costing one-half their face value and earning interest that are usually tax-free if used for a college education. More importantly, kids can’t spend bonds easily, reinforcing your saving for college message. Also, don’t stop them from withdrawing small portions of their savings to make purchases — This usually discourages them from saving.
5. Teach kids how to invest
Once they have mastered basic banking skills, encourage your children to learn about stock market investing. Explore appropriate stocks, bonds and mutual funds as a game with your children.
6. Teach kids how to budget
Start early teaching kid about budgeting. Show them how to plan and budget for a family birthday party, picnic or barbecue, so they can start practicing their budgeting skills.
7. Teach kids about spending decisions
Allow children to make spending decisions, whether good or bad teaches them to make better decisions. They will often learn from their spending mistakes (see “Biggest Supermarket Mistakes“). Your family “talk about money” time should include the pros and cons of spending money. Encourage them to use common sense approach to buying. This means doing research by comparison shopping, waiting for sales to buy, and using the “wait-for-two-days” technique. This technique involves selecting at couple of items and waiting at least three days before buying. Studies show this is one the strongest techniques to curtail impulse buying.
8. Teach them about smart buying
Show your kids how to check TV, radio, and print ads for what they are. Powerful tools to separate them from their money. One of the strongest techniques to teach kids about ads is the counterintuitive marketing. Whenever they see or hear advertising they must say themselves: “This is bad, or I don’t need that or that’s a waste of money.” By protecting their influential minds against the subliminal messages of the advertising agencies, the money saved will add up to hundreds of thousands of dollars. Teach them to further enforce this technique by asking questions like, will the product really do what the ad says? Is this truly a sales price? Are alternative products available that will perhaps do a better job, and less cost or offer better value? Remind your child that if a product sounds too good to be true, it usually is.
9. Teaching them about credit and borrowing
Teach by example the dangers of borrowing money and paying interest. Charge your kids interest on small loans you make to them, they will learn quickly how expensive it is to borrow a bank’s money. For example, If he/she wants a $499 cellphone charge them 18.8 percent over 18 months, which equates to $31.85 a month, totaling about $575. Your child will soon get the idea what it means to borrow money, especially after you take it out of his/her allowance.
Now using credit cards at retail stores and restaurants gives you an opportunity to teach kids how credit works. Explain to them how to calculate the tips, how to verify the charges, and how to guard against fraud. Credit cards should never be made available to young children, even when entering college. I would strongly discourage them from applying for cards once in school also. Credit cards have one message to kids: “Lets pile up debt!” Studies show students use the cards for cash advances and to meet everyday expenses, instead of for emergencies (even after being taught). Reports also show that these students find themselves cutting back classes to fit part-time jobs in their schedules, just to pay their credit card bills.
10. Teach kids to keep records
What good is teaching kids about money if they never learn to keep financial records. Without records they won’t know where they’ve been or where their going financially. Keeping adequate financial records for money saved, invested, or spent should start as early as possible. It’s another important skill all young children should learn. Make it simple: Start by using 12 envelopes, 1 for each month, with a larger envelope to hold all the envelopes for the year. Establish this system for each child. Encourage children to place receipts from all purchases in the envelopes and keep notes on what they do with their money. Tell them the one whom saves the most get an extra bonus of $5 at months end.
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