Best Practices for Teaching Kids to Handle Money
When it comes to refining the skills we need to successfully navigate adult life, financial competency is essential. As a parent, it’s your responsibility to teach your children important lessons about money that will help them to avoid (or at least be prepared for) some of the cash worries that we face as adults ourselves.
Looking at current statistics – a mortgage crisis that lead to 3.9 million foreclosures, national student loan debt exceeding $1 trillion (that’s EIGHT zeroes!), and credit card debt of around $845 billion – it’s pretty clear that we could use some additional guidance with money management. To help the next generation avoid the same mistakes, we need to teach them the essentials of how money works.
- Lesson 1: Patience is Key
When you’re a child, you want everything – and you want it now. Learning that you might have to wait for something you want can be a tough lesson to learn, no matter your age. However, the ability to delay gratification will have an impact on your child’s success as they grow up.
Kids need to learn from an early age that if they want something that costs money, they need to wait, save, and buy it in time. Discuss with your children how important it is for them to wait their turn when they’re in a line or try creating a system of saving in your house. Whenever your child receives money as an allowance, for their birthday, or as a reward for doing chores, remind them that they can save that money for bigger purchases at a later date.
- Lesson 2: You Can’t Have Everything
Children struggle to understand money at a young age, so it’s important to let them know that their resources (and yours!) are finite. In other words, they need to learn to make wise choices about what they spend their money on. For example, if your child wants two toys, but only has enough money in their savings jar for one toy, help them figure out which item they want the most.
When they’re not spending money themselves, involve your child in financial decisions. For instance, explain that you chose generic juice over a brand name is because it tastes the same and costs 50 cents less.
- Lesson 3: The Sooner You Start Saving, the Faster Money Grows
When your children reach their pre-teen years, you’ll be able to help them open a bank account, and introduce them to the concept of compound interest that allows them to earn interest on their savings.
It’s a good idea to use specific numbers when explaining interest to children, as research has found that this is more effective than abstract figures. For example, tell them that if they save $100 every year from the age of 14, using compound interest, they’d have $23,000 by the time they turned 65, whereas they’d only have $7,000 if they started saving when they were 35.
There are websites online that can help you calculate compound interest. You can give your child a few figures as homework to help them get a better understanding of how the system works.
- Lesson 4: Everything has a Cost
While it’s easy for children to see the price of objects they pay for themselves, such as groceries and toys, it’s difficult to come to terms with the fact that other things have expenses too. Talk to your child about how much you pay out on different bills every month, from electricity and gas, to water rates, and other crucial expenses. This ties back into Lesson 2 – you can’t have everything, and sometimes you need to prioritize. This is an especially relevant point for college-bound teens; they may want to buy a new video game but they need to pay the utility bills. Explain that without electricity, they won’t have internet – that should help them understand!
Discuss your child’s future with them, and how much you can afford to contribute to their college education, compared with how much an average education might cost. You could even encourage your children to start searching for net price calculators on college websites so that they can figure out how much each one will cost when they finish school.
If you’re having trouble with finances, and you feel as though you could use some help dealing with your own cash concerns, contact our office for a free consultation.