School may be out for the summer, but it’s the perfect time to establish the groundwork for a lifetime of financial security by teaching your kids good money habits.
Time is the greatest asset kids have. From an early age to the time they leave the nest, it’s vital for them to learn how to earn, save, and spend wisely.
Sound money management is one of the most important topics to teach your child. How you manage your money has a direct effect on virtually all areas of your life. Properly managed, your money can provide financial freedom, security and overall peace of mind.
So, what do you want to teach your child about money and when should it start?
Essentials of Money Management
What children learn about money starts with them observing how you manage yours. Are you displaying good money habits? Do you save consistently? Do you spend your money wisely?
Ron Lieber, author of the book “The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous and Smart About Money” states that children are hyperaware of money and that parents should be communicating often with their kids about money from an early age.
Earning Money: Many experts recommend an allowance as a way to demonstrate how to save and spend. Lieber suggests using an allowance as a tool for teaching basic values like patience, moderation and generosity.
The JumpStart Coalition for Personal Financial Literacy says that parental goals when paying an allowance should be to:
- Provide a method, under proper supervision, for learning about accumulating money coupled with proper spending techniques.
- Eliminate or dramatically reduce the need for the child to have to ask for money
- Shift some spending decisions to the child
Saving/Investing Money: If your child has an allowance or your teen has a summer job, it’s the ideal opportunity to teach financial management and discipline. It’s important to talk with them about their short-term and long-term priorities and goals and how they will save their money to reach them. What are they saving for? Earmarking earnings is an important part of deciding how much you can spend and save.
Parents can add an extra incentive to their child’s savings plan (family 401k) by kicking in a matching contribution…much like employers match employees 401(k) retirement savings plans. Melody Hobson, president of Ariel Investments, suggests for every dollar of their money your child puts away in the bank, you can match a percentage. Having their own savings account, and getting monthly statements from the bank, can also be a good way to teach them about interest and compounding.
Spending: Understanding the difference between a need and a want is an important money lesson for kids…and even adults.
Needs are items we must have in order to survive and thrive:
- Medical Care
Wants are nice to have, but we don’t need them to survive:
- Cell phones
- Video games
- Designer clothing
To help your young child understand the difference between a need and a want, Investopia suggests asking your child what would happen if your family spent your entire paycheck on toys one week, with nothing left for food or to pay your other bills. Explain that even though everyone really wants the toys, you have to pay for needs – things like food, shelter and heat – before you can buy items that are wants.
The concept of spending wisely shouldn’t be lost on teenagers and kids in college, either. Provide them with a prepaid credit card to get them acquainted with budgeting for needful items, such as gas, books and food. Unlike a credit card, there is no interest charged on a prepaid card and your teen can’t spend more than what is on the card.
Setting a Firm Financial Foundation
A great place to start your child’s financial education is at home. Very few schools require courses in economics or personal finance. Only 19 states require high school students to take a course that includes personal finance, according to a 2014 report from the National Council on Economic Education.
A recent study by FINRA found that states with rigorous personal finance mandates in their schools had higher levels of financial literacy behaviors among students than states with no mandates.
To keep building your child’s financial knowledge, talk with your child’s teachers, school administrators or parent teacher organization about making sure financial education is part of the curriculum.
Money mistakes can happen, whether you’re on message or not. However, providing the education and setting priorities can help your kids stay on the right financial track.
How do you teach your child about money? When is the best time to start the conversation?