A recent poll showed that nearly 80% of college freshman admit to never having had a discussion about money management with their parents. 80%! That number is just astonishing. If you have children and you’re considering what is a good age to begin teaching them about money, the answer is, it’s really never too early. Teaching your children early on about the value of saving, the concept of working to earn money, and even the importance of using a budget will go a long way towards laying the groundwork for their financial success later in life. Not only will they be raised as money-conscious people, but their appreciation for money and the ability to know how to manage it will be honed. Here are several ways that you can start nice and early with your kids and introduce them to the world of money:
Start with the Basics
First things first. You’ll need to teach your child the vocabulary before you start explaining the concepts. Together with your child, look up words like “save,” “budget,” “spend,” “earn,” and “bank” in a children’s dictionary. Make sure your child understands the meanings of these words. Have them practice using these words in sentences before you go on with your financial lessons, otherwise they may have confusions about the meaning of money-related terms.
Make them Earn It
Work ethic is a highly valuable trait in a person, and I believe that it can be instilled at a young age. Part of one’s work ethic stems from the realization that money is earned by working. For this reason, an allowance at a young age is a good idea, so long as there is an exchange: your child completes certain chores or tasks around the house (make sure they are age appropriate, of course,) and you in turn reward them with an allowance. This system shows kids that money is not free, and further, that more money can be earned with more work completed. Give your child the opportunity to earn a bit more in allowance if they opt to do odd jobs in additional to their regular chores. This is a good tactic, say, if they are trying to save up for something, which brings us to our next section.
Show the Value in Saving
There are many ways to do this, but the end result is that your child realizes that if he or she spends all his or her money right away, it’s gone. And what’s more, if they keep spending it right away, they’ll only have a small amount to spend each time. They should grasp the concept that if they choose to wait a little longer (a very healthy exercise in and of itself, as it moves children away from immediate gratification,) they will have enough money saved up to buy a bigger, better item. You could teach them how to save by flipping through magazines at home, and having them point out toys that they really want. Help them understand that they can have it, as long as they save up for it. (This is where you can use the option of allowing them to earn extra allowance for more chores.)
Pass on your “Bargain Hunting” Skills
Another good thing to teach your children from a young age is that sometimes, the same products cost different amounts depending on where you shop for them. Challenge your kids to find the least expensive can of green beans in the grocery isle, or have them clip coupons with you then let them watch as the total price of your groceries goes down once you submit a coupon. It’s easy to make a game out of bargain hunting, looking for deals, and shopping the sales. Showing your kids that they can get more for each dollar if they wait for sales is an exciting and valuable skill to pass on!
Build a Budget
When they are old enough to understand the concept of a budget, show them the family budget (or a simplified version) that you use for things like bills, utilities, groceries, gas, and the mortgage. Help your child construct a budget too, for his or her clothes, toys, entertainment, and special school supplies. Take the amount that your child will make in one month through allowance and have your child help you divide it through the categories that you create. You can ask your child, “What if you don’t need any clothes this month, but really want a big toy next month?” Soon they will comprehend the concept that money can roll over from month to month, if they save it for a little while.
Enlighten them on Interest
This concept is a bit more complex, but it’s easy to replicate at home. You can do it on a small scale, or even open a bank account for your child and do this for real. Explain to them that if they choose to save their money for a long time, not just from one month to the next, that they can earn what is called interest. To help them understand, you might even offer to match the money that they choose to save long-term dollar for dollar, since interest does accumulate slowly and it would serve to illustrate the idea. Let them know that the longer they keep their money in their account and don’t spend it, the more interest they will earn.
Be Honest about Your Finances
When I was young, my parents never talked about finances with me. Money, paychecks, and mortgage all seemed very otherworldly to me, and I definitely found myself in that 80% of clueless college freshmen when I moved out. Being honest with your kids about your own budget, your paycheck, and other financial issues brings money to reality for them. It also allows your children to realize that you do have financial limits, and that no one is “made of money.” And if you have some financial setbacks, it’s okay for your kids to see these too. Being totally transparent might seem scary, but people learn from the mistakes of others, and your errors could be good learning tools for your little ones. For instance, if you your budget is tight one month because you are paying off some credit card debt, share that with your children. That, of course, will segue into talks about borrowing money, paying back in interest, credit cards, what a credit score is, and other more mature topics.
Just go one step at a time, laying the groundwork for a good grasp of how money is earned, used, and saved and honing your child’s ability to make smart financial decisions. I promise your child will be better off for it!