5 FUNDAMENTALS: HOW TO RAISE MONEY-SMART KIDS
All parents hope their children grow up to become financially independent adults. Yet, when it comes to learning money-management skills, kids don’t always get the guidance they need. Topics like budgeting and personal finance are not routinely taught in school. And at home, parents often fall short because they feel uncomfortable talking about money or are unsure of their own financial know-how.
If you’ve struggled with how and when to approach the subject in your home, consider taking these five fundamental steps; they’ll help your children begin to understand the value of money today and encourage them to establish good saving and spending habits for the future.
- Start early. As soon as your kids are old enough to count, they’re old enough to start learning about money. A 2013 Cambridge University study suggests that by the age of seven, most young children grasped all the main aspects of how money worked and formed “core behaviors that they will take into adulthood and will affect financial decisions they make during the rest of their lives.”
- Talk openly about money. Most Americans would rather talk about their own death or the birds and the bees rather than talk about money with family and friends, according to Northwestern Mutual’s 2014 Planning and Progress Study. But if you want your kids to be money-savvy adults, one of the most important steps you can take is to talk openly about money. You don’t have to reveal your salary to your eight-year-old daughter, but you can help her understand where money comes from; the difference between saving and spending; and how much money it takes each month to pay the household bills, fund ballet lessons and still save for future goals like a family vacation or for her college. If you’re not sure where to start the money discussion with your kids, websites such as themintorg.com and parents.com are filled with age-specific topics and activities to get you and your kids talking about money – everything from helping a preschooler learn to count coins to discussing credit scores with your teen.
- Use allowance as a teaching tool. In many families, a child’s first real experience with money comes when he or she begins to receive an allowance. Six in ten American parents give allowances to their kids, according to the American Institute of CPAs, and the practice can be a great opportunity to introduce kids to the all-important concept of budgeting — the cornerstone of a healthy financial foundation. To take full advantage of using allowance as a teaching tool, some financial experts recommend setting up a series of containers in the child’s room — one each for:
- SPENDING: Kids can spend freely from this jar, but when it’s gone, it’s gone.
- SAVING: Children can set a spending goal and save up to meet it.
- GIVING: This introduces kids to the idea of sharing with those who may have a greater need.
In his book The Opposite of Spoiled, New York Times personal finance columnist Ron Lieber suggests keeping things easy, at first, by having your child put equal shares of his or her allowance in each jar. And then, after a few years, consider letting the child decide how to allocate the allowance and where to donate the money that accumulates in the “giving” jar. Some parents also incent their kids by paying interest on or matching contributions made to the “saving” or “giving” buckets as a way to encourage children to think beyond what their allowance can buy today.
- Let them make mistakes. When Brian Rankel’s two sons turned seven and ten years old last year, he and his wife Hillery began offering them a weekly allowance. Their goal was to motivate the kids to do their chores, but the Rankels discovered a side benefit, too: The kids are making their own mistakes and learning valuable money lessons while the risk is still relatively low. “My boys have been disappointed by some of their impulse purchases, like video games that have turned out to be something other than what they expected,” said Brian. “I hope these experiences teach them that instant gratification has a downside — that there’s value in thinking carefully about how they spend their money.”
- Be a good example. It is hard to convince kids to delay gratification in favor of saving if they see their parents regularly making impulse purchases at the checkout or saying things like “We don’t really need this but …” before buying something. Children learn when they live, so be the example you want them to follow. Ask yourself:
- Do I wait for an item to go on sale?
- When I make large purchases, do I research brands and features?
- Do I comparison shop with my kids to underscore the seriousness of the purchase?
- Have my children ever seen me save up for large purchases. Or do I whip out the credit card when I see something I want?
Your saving and spending habits will undoubtedly shape the saving and spending habits of your children, especially since, as the Cambridge study suggests, they’re forming money-related behaviors before they reach the second grade. So do your part to set an example early, talk openly about money and use allowance as a teaching tool. In doing so, you’ll not only help your kids understand the value of money, you’ll give them the opportunity to experience the joy that comes with saving up for a special purchase and the delight of sharing their good fortune with those in need. Hopefully, those are experiences and habits they’ll choose to continue into adulthood.