Ask your child where money comes from and you’ll probably get an entertaining answer.
Maybe they’ll say, “From a tree,” or, “From a machine,” or even, “Magic!”
Children might not understand where money comes from, but they do understand that it can buy them things that they want.
Because of that, it’s wise to start teaching them about money as soon as they become interested.
The world abounds with adults who view money about the same way as uneducated children do, but the simple lessons you teach today will give your child a solid foundation for making a lifetime of quality financial decisions.
Here’s how to teach your child about money.
Lesson 1: Learning to Handle an Allowance
An allowance is often a child’s first brush with financial independence. It’s the first opportunity for them to begin saving and budgeting for the things they want.
It’s up to you to decide how much to give your child based on your values and family budget, but a rule of thumb used by many parents is to give a child 50 cents or 1 dollar for every year of age.
To come up with the right amount, you might also want to consider what your child will need to pay out of his or her allowance, and how much of it will go into savings.
Some parents ask their children to earn an allowance by doing chores around the house, while others give their children an allowance with no strings attached.
If you’re not sure which approach is better, you might want to compromise. Pay your child a small allowance, and then give him or her the chance to earn extra money by doing chores that fall outside of his or her normal household responsibilities.
If you decide to give your child an allowance, here are some things to keep in mind:
- Set some parameters. Sit down and talk to your child about the types of purchases you expect him or her to make, and how much of the allowance should go towards savings.
- Stick to a regular schedule. Give your child the same amount of money on the same day each week.
- Consider giving an allowance “raise” to reward your child for handling his or her allowance well.
Lesson 2: Opening a Bank Account
Taking your child to your local bank or credit union to open an account (or opening an account online) is a simple way to introduce the concept of saving money. They’ll learn how savings accounts work, and will soon enjoy making deposits.
Many banks and credit unions have programs that provide activities and incentives designed to help children learn financial basics. Here are some other ways you can help your child develop good savings habits:
- Help your child understand how interest compounds by showing him or her how much “free money” has been earned on deposits.
- Offer to match whatever your child saves towards a long-term goal.
- Let your child take a few dollars out of the account occasionally. Young children who see money going into the account but never coming out may quickly lose interest in saving.
Lesson 3: Setting and Saving for Financial Goals
When your children get money from relatives, you might want them to save it for college, but they’d rather spend it now. They don’t always see the value of putting money away for the future.
So how can you get your child excited about setting and saving for financial goals? Here are a few ideas:
- Let your child set his or her own goals (within reason). This will give your child a feeling of control and some incentive to save.
- Encourage your child to divide his or her money up. For instance, your child might want to save some of it towards a long-term goal, share some of it with a charity, and spend some of it right away.
- Write down each goal, and the amount that must be saved each day, week, or month to reach it. This will help your child learn the difference between short-term and long-term goals.
- Tape a picture of an item your child wants to a goal chart, bank, or jar. This helps a young child make the connection between setting a goal and saving for it.
Finally, don’t expect a young child to set long-term goals. A week is much longer for them than it is for us so something a month from now might as well be a decade away.
So young children may lose interest in goals that take longer than a week or two to reach. And if your child fails to reach a goal, chalk it up to experience. Over time, your child will learn to become a more disciplined saver.
Lesson 4: Becoming a Smart Consumer
Commercials. Peer pressure. The mall. Children are constantly tempted to spend money but aren’t born with the ability to spend it wisely. They need guidance from you to make good buying decisions.
Here are a few things you can do to help your child become a smart consumer:
- Set aside one day a month to take your child shopping. This will encourage your child to save up for something he or she wants rather than buying something on impulse.
- Just say no. You can teach your child to think carefully about purchases by explaining that you will not buy him or her something every time you go shopping. Instead, suggest that your child try items out in the store, then put them on a birthday or holiday wish list.
- Show your child how to compare items based on price and quality. For instance, when you go grocery shopping, teach him or her to find the prices on the items or the shelves, and explain why you’re choosing to buy one brand rather than another.
- Let your child make mistakes. If the toy your child insists on buying breaks, or turns out to be less fun than it looked in the commercials, eventually your child will learn to make good choices even when you’re not there to give advice.
Financial literacy is like learning how to read: the earlier you begin the better. Like reading, it becomes more interesting the more you do it and grows as you do.
We’re constantly learning and helping our clients learn how to be better investors and plan for their family’s future.
As experienced financial professionals, we help clients like you figure out the best strategies for their situation so that they can save and invest their money with peace of mind.
Please connect with us and let us help you plan for your future. We would be delighted to go on the journey