How to give your kids the financial education you didn’t get
If you search the internet for financial education articles about “money lessons” there’s list after list of lessons you need to learn by a certain age or rundowns from individuals about what they wish they had learned about money when they were younger. These financial information catalogs cover everything from saving and investing to compounding interest. Let’s break the cycle of people not learning about money at a young age and your kids won’t end up writing one of the “what I wish I had learned” lists. So how exactly should you teach your children about money? The best advice I can give is to start teaching your children about money as soon as possible. Warren Buffet even says to start teaching your children these lessons when they’re in pre-school. Here’s a breakdown of great ways to incorporate financial education into their lives:
Offer an allowance – Setting a weekly allowance for kids in exchange for completing chores can impart an important message that children have to work to earn money. However, this concept can get tricky because you may not want to reward kids for doing chores they should naturally be completing. A good balance may be having them do normal daily chores but explain that to earn money, they’ll have to do extra tasks like giving the dog a bath. If you give your kids an allowance don’t take it away as punishment because you don’t want kids to associate money with anxiety. Also, set boundaries so they know what types of things you’ll pay for and what items they’ll have to use their allowance to buy.
Help them to save – This is where those piggy banks come in! And also plays into what I was just talking about with setting allowance boundaries. If there’s something your child wants to buy that costs more than their weekly allowance, they’re going to have to save their allowance until they have enough money. When putting the money in a piggy bank or jar, kids can physically see the money being saved for a future goal. This helps teach children the concept of delayed gratification.
Encourage them to invest – Open a small investment account and have your children pick a company they like or use. Examples can include Apple, Nintendo, and Mattel. Regardless if the company is a good investment, it teaches kids about how the stock market works.
Have them witness financial transactions – Start a savings account for your child and have them participate in the transactions. Take your children to the bank and have them fill out the deposit slip and show them their savings account statements to help them understand how banking works.
By teaching these important financial lessons earlier, you set your children up for a lifetime of financial success. However, you can’t just teach these lessons when children are young enough to think a piggy bank is cute. Financial education should continue throughout their adolescence as they work summer jobs, through college and even into their early 20s as they begin their careers. Here’s a look at how financial education can change as children age and get their first jobs, credit cards, and experience more financial firsts:
Saving – As kids get older, help them understand the best way to save is to use the technique of paying yourself first. Meaning, when you get your paycheck, put a portion of it into your savings account first, before you do anything else. Before you pay bills or buy groceries, pay yourself! Next, they should figure out a budget based on the money coming in from each paycheck. After paying themselves first and allocating money for bills and other necessary expenses like food and gas, they will have some money left over to spend on them. This leads us into the next money lesson.
Spending – It’s important for kids to consider how they spend their hard-earned dollars. Just because there’s some extra money left over in the budget to spend doesn’t mean you should. Eating dinner out every night or buying a new pair of shoes whenever there’s a sale is not worth it. Is it your Dad’s 60th birthday celebration dinner? Sure, spend the money if you have it. Is it just a regular Tuesday? Maybe make dinner at home and save that extra money.
It’s also important to learn impulse control. In the moment your child may really want that new, shiny, sleek watch, but is it really that important? Teach your kids to practice patience before purchasing. They should learn that if they see something they really want they should wait, even for just a day or a week. It’ll put it into perspective and help your kid see that the thing they “just had to have” isn’t really that big of a deal. By waiting and not buying right away your children will learn to control unnecessary spending, which is critical for successful money management.
Credit Cards – While we’re on the topic of spending, let’s talk about one of the big tools people use to spend their money — credit cards. Kids need to learn the good and bad of credit cards. While using a credit card may seem like it’s “free money” since no cash is exchanged, it’s crucial to remember that credit cards come with a price. Make sure your children understand they will have to pay that money back to the credit card company and, if they don’t do it on time, they will have to pay interest on top of that. And typically, credit card interest rates are pretty high so they’ll end up owing much more than they spent.
Avoiding credit cards altogether may not be wise either. Credit cards are a great way to build credit if used responsibly. Using credit cards responsibly means paying them off in full each month. Here’s a tip, tell your kids to treat a credit card like a debit card. They must have the money in their bank account right now to pay for everything being charged on that card. If there’s not enough money in their account to cover the expense, don’t charge it.
Investing – Financial education changes as children get older. Investing will be much more complicated than simply picking a company they like and buying some stock in it. Investing is a great way to build wealth to help pay for bigger expenses down the road. Simply put, investing is allocating funds somewhere now with the expectation of generating a profit later. This profit comes from the magic of compound interest. Compound interest means that the interest you are getting back on your money is for the entire pot of money, even as it grows. So in the first year if you have $1,000 with 5% interest you’d make $50 but then the next year that same 5% interest rate is applied to your new total of $1050, so you’ll make more in interest as your total amount of money grows, from that interest. Your kids will probably like the sound of making more money. It sounds great to be able to make money by simply investing, but caution your children to only invest once they know they can pay their monthly bills and contribute to their savings. It’s also important that they know they’ll want to have saved at least three months’ worth of living expenses in an emergency fund before investing. So how much should someone invest? A common piece of advice is to invest 10% to 15% of your earnings a year, but if that’s not realistic for your kids, tell them to at least start with the minimum initial investment. No one needs millions or even thousands to invest, you can actually invest in the market with just a few hundred dollars.