The Top 5 Things to Teach Kids About Money
May 27, 2013Happy Memorial Day! If you have young kids, this unofficial start of summer is a great opportunity to start thinking about how you can use some of their time away from school for another form of education: how to make smart financial decisions that can benefit them for the rest of their lives. After all, the first money lessons your child gets will likely come from you and can have a major impact on their ability to avoid major financial problems later in life. In particular, these five basic concepts should be incorporated into your child’s education about responsible money management:
1. Understand the value of work: This important lesson isn’t so much about money as what it takes to earn money. As early as kindergarten or first grade, your child can be involved in the process of paying for things. It’s amazing how many little expenses and money requests come home in our kid’s backpacks and this started as early as pre-school.
Children need to be involved and start to understand as early as possible that a good day’s work should deliver a good day’s pay so it’s a good idea to come up with age-appropriate chores in exchange for an allowance. The best place to start is with simple jobs like setting the table and making beds. For older kids, yard work, laundry and housecleaning are good to add to the list.
How big should that allowance be? Try to match the allowance closely to the expenses you want your child to cover and leave a little wiggle room for treats. That way, the child begins to understand choice while learning that spending requires limits. Also, offer options that allow children the opportunity to earn additional money for extras – toys or privileges, for instance – then stress why working for these special rewards is important. When kids are younger, you should keep a frequent watch over how they’re handling their cash – checking in every day or so – and then allow them more leverage as they demonstrate wise decisions.
2. Saving: Once you teach your child about responsible spending, help them identify larger goals they would like to save for. Buy a piggy bank (or a stuffed dog that wags its tail every time it gets a coin) – young children relate very well to this tried-and-true symbol of saving. It gives them someplace to put money out of sight so they don’t spend it and you should impress upon them that they are free to tap into it only to accomplish a goal that the both of you initially discuss. Again, as they make smarter decisions, let them have a chance to display even more responsibility. And this lesson shouldn’t just be about buying stuff – kids need to learn how money can be used for setting and accomplishing goals.
If it makes sense for you, you can also add incentives to save. One idea is to create your own version of a 401(k) match. Tell your son or daughter that you’ll give them $1 for every $5 or $10 they put in the bank. It will definitely make them think twice about an impulse purchase.
3. Budgeting: Budgeting is one of the most universally misunderstood money concepts for children and adults. That’s why it’s so important to make sure a child understands why you should write down money priorities and keep track of whether those priorities are being met. When a child gets a little older, it might be a good idea to help them establish a budget for everyday expenses with an important side goal, such as accumulating spending money for a much-anticipated family vacation. Parents might show kids a similar exercise for how they’re setting aside money for the trip.
Unsure how to set up a budget? Here’s a simple version for young children from PBS Kids http://pbskids.org/itsmylife/money/managing/article6.html and older kids can use this Easy Spending Plan.
Parents with younger kids can try to turn the budgeting process into a game. One example is to take a stack of fake money, give it to the child and ask them what they would spend it on. The child would write down each purpose – toys, school lunches and special things they need to save for – and get them to write down how they’d allocate the cash. This can turn into a real exercise later once they are old enough to spend real money with a plan.
4. Delayed gratification: If budgeting and savings are going to work, kids (and some parents) need to know they can’t spend their money whenever they feel like it. Parents need to lead by example here and this is easier said than done. If kids always see parents paying with plastic and bringing home carloads of shopping bags each week from the mall, they might get a sense that money is limitless. On the other hand, if they see you making lists, tearing out coupons and talking about saving for particular goals over the long term – they might start to mimic that behavior and at least learn the importance of figuring out how to appropriately manage limited financial resources.
5. Helping others and developing a sense of gratitude: It’s important for children to know that there is always someone less fortunate than themselves and it’s important to help, even in a small way. Increasingly, kids are involved in charitable and community activities as part of their educational process – such work even figures into college applications. Teaching your children to set aside a little for those who have less might be a good first lesson in what should be a lifetime of sharing with others.
Also, don’t forget that charity isn’t always about money. Kids should also learn the importance of giving their time and talents to important causes and people in need. And if they think of unique and effective ideas to help, by all means, praise and encourage that activity.
Here are some additional resources for parents and teachers:
http://kids.usa.gov/grown-ups/for-parents/money/index.shtml
http://www.fdic.gov/consumers/consumer/news/cnspr08/index.html
http://www.moneycrashers.com/best-fun-educational-apps-kids-money-management/
Hey parents! I want to hear from you. What are some financial education tips and lessons that you have found effective with your children? Leave your thoughts in the comments section below.