As parents, we spend time helping our kids develop skills to build healthy relationships with friends and family. We also need to help them build a healthy relationship with money.
Parents can help kids develop core beliefs about money. It is these core beliefs that drive financial behaviors. Core beliefs include saving money, spending money based on your values, having low debt, and having an emergency fund to meet unexpected expenses.
Where Does Money Come From?
Kids need to understand that mom and dad make money by working and investing. They need to understand that money doesn’t come from credit cards, banks or wallets.
A few basic ideas on money that every kid needs to know.
Things Cost Money
We need to help kids understand that things cost money. They need to understand that parents can’t afford everything, and that money must be spent wisely. When you take your kids to the store, pay with cash so they understand that money was exchanged for a certain item at the store.
Delayed Gratification
Teach them delayed gratification. Teach them that impulse is not good. Start with small things such as asking them to wait 15 minutes before they can open a candy. Invest money with your kids, and show them how money grows over time.
Compound Interest
Compound interest is the foundation of investing. Even Albert Einstein called compound investing the eighth wonder of the world. Help your kids understand how money grows over time. For example, show how a stock of a company they like (such as Disney or Google), has appreciated over time.
Saving, Investing, And Giving Back
Kids need to understand that they cannot spend all the money that comes in. Part of it needs to saved and invested. You can also encourage them to save, and give money to charity because giving back is a key part of handling money.
Here are some practical ideas you can use to teach kids about money.
Using a Piggy Bank
Ask them to save their money in piggy banks when they are very young. Ask them to have multiple piggy banks – one to spend, one to save and invest, and others to give to charity.
Bank account
Open a bank account in their name when appropriate, and ask them to manage the account. Managing a small amount of money early will prepare them for the day when they will have a full-time income, and need to manage a big balance in their bank account.
Part-Time Jobs
When they are ready, encourage them to get a job. This will give them hands-on experience on making, and managing money. When they get the first paycheck, and 30% goes to taxes, they will understand that paying taxes is a part of life.
In addition to teaching them about money, jobs give them an opportunity to work and learn to get along with others.
Make A Budget and Ask Them To Manage Their Money
Even if the kids have only a small amount of money, ask them to make a budget. This will give them an opportunity to plan their savings and expenses.
Show By Example
Kids follow our habits. When we overspend, they are likely to overspend too. Be wise when spending your money, and talk about your money decisions with your kids. Involve them in family budgeting when it’s appropriate. When you are about to make a big purchase, ask for their opinion and let them see how you arrive at a decision to buy certain things.
If you live a simple, and frugal life, they will too. If you are content with your life, so will they.
Understanding the Dangers of Debt
Staying away from too much debt is key to financial independence. Kids need to understand the dangers of carrying credit card debt. Too many kids get in credit card debt early and struggle to pay back for years.
Bottom Line
Just like building any habit, building good financial habits takes time. Parents have the opportunity to get kids on a good path early. Teach them the principles of delayed gratification and compound interest early. Allow them to set a budget, and manage small amounts of money. They may fail a couple of times, but by the time they become adults, they will have the experience necessary to manage money on their own.