Teaching Kids About Financial Responsibility
Teaching kids about money involves a lot more than just making sure they understand that there are four quarters in a dollar.
So how do you instill good money values in your kids to make sure they end up with a cushy 401K and an emergency fund, rather than piles of bills and mounds of credit card debt?
It starts early — and like any good return on your investment — compounds over time. Teaching them about financial decisions when they’re young, and letting them make mistakes, will make it less likely that you’ll be bailing them out of a tight financial spot later.
“Financial literacy is not about depriving your kids of toys and things that they want. It’s about teaching them how to make smart decisions,” says Laura Levine, president and CEO of Jump$tart Coalition for Personal Financial Literacy.
Here’s a step-by-step guide on how to teach your kids about financial responsibility from toddler to teen years.
You can start teaching kids as young as toddlers what money is and how you use it.
Learning: Start with the basics. Young children don’t yet understand what money is or where it comes from. For now, use tangible money — dollars and coins, so they can understand that different types of money are worth different amounts.
Earning: Teach them that you make money by working. Talk about your job and other jobs in your town. You could even work with them to set up a lemonade stand or other ways to earn small amounts of money.
Spending: Help them to understand that you use money to buy things. When you go to the store, give your child a dollar or two. Let her pick out one item to spend it on. Levine says she did this with her son, and it helped him realize the value of money and that different items cost different amounts. For a dollar, he might be able to buy a candy bar or a small bag of chips. Even if he wanted the bigger bag, he realized that he couldn’t afford it, she says.
Saving: Get them a piggy bank or a clear jar and let them watch their money accumulate. Paul Golden, spokesperson for the National Endowment for Financial Education (NEFE), suggests banks with electronic counters so your kids can see how much money is inside at all times.
At this age, kids tend to have a better understanding of the basics of money, and these are critical years to help teach them how to spend and save.
Learning: Golden cautions that the ease with which money is transferred electronically can make it harder for parents to teach the value of money. “We as parents have additional challenge since there’s less tangibility to it,” he says, referring to credit cards and direct-deposit paychecks. Your kids “do not see money coming or going.” But he recommends simply being more vocal about it, such as mentioning that you are waiting to buy that new sweater until after your next payday.
Earning: If you choose to offer your child an allowance, a good age to start is about five or six. The decision to pay based on chores or simply on a certain date is entirely up to you — however, the experts stress that you must be consistent. If you pay for chores, always pay for chores and pay on a schedule as well. If you decide to pay once a week or every other week, continue to pay on that schedule. Paying an allowance on given dates teaches your children to budget, just as you budget from paycheck to paycheck. If your child gets a weekly allowance and spends all his money the day he gets it, then he will learn that he has no more money until the following week.
Spending: When you go grocery shopping, ask your son to help you find the lowest price of a specific item, like a loaf of bread. This will help him understand that similar items may still be priced differently and teaches him to comparison shop. At this age, you can also allow him to spend his own money and make mistakes — while still setting boundaries. Levine says she allows her 8-year-old son to buy his own video games, although certain types of games are known to be off limits. She was surprised when he discovered how to stretch his money by getting used video games. When he buys sports games, he wants the newest version, but “for others, he has discovered that he can get more if he buys them used,” she says.
Saving: Consider setting up guidelines on how much to spend, how much to save and how much to donate. You may even want to set up separate piggy banks or jars for each category or buy a bank that has separate slots for each. Get your kids in the habit now of setting aside some money for saving and donating. Help them to understand the importance of saving money by setting savings goals for bigger toys. Having something tangible that they’re saving for will make it easier for them to understand, says Levine, than trying to teach them at this age about emergency savings or saving for a far away goal like college.
Continue building a good foundation at this age. By now, it will have become very clear if your child is naturally a spender or a saver, and you can adjust your message accordingly.
Learning: Remember that kids learn by example and by watching you, says Golden. If they see Mom and Dad go to the mall and splurge every Saturday, he says, then they are more likely to do that as well. Worried that you’re not the best person to give financial advice? That’s ok, too, he says. Just be honest with your kids about the mistakes you’ve made and let them know that you don’t want them to have the same challenges you’ve had to overcome. Having dealt with debt head-on can make you a better mentor.
Earning: Playing games, like Monopoly, can be a great way to teach about the concept of spending money to earn money, says Levine. Think about what happens when you buy a hotel or a house in the game — your cash goes down, in the hopes of making it back and more. The principle can hold true in the real world and “it’s a fun way to make it applicable,” she says.
Spending: Teach kids at this age to comparison shop by having them help you find a deal for a more expensive purchase that you may be making (such as a TV or computer). They can help do the research and be involved in the decision-making process.
Saving: Your kids now have the math skills to understand the idea of compound interest. Teach them that money saved now will accumulate to a bigger amount than the same amount of money saved when they get older. The Money As You Grow website (MoneyAsYouGrow.org) gives an example of a 14-year-old who saves $100 a year and will have $23,000 at age 65, assuming 5 percent interest. But contributing that same amount starting at 35 will only add up to $7,000 at 65.
The teen years are crucial, but if you’ve provided your child with a good foundation until this point, he should be well on his way to a good financial future.
Learning: When your child reaches high school age, it may be a good time to work with outside resources. Find a way to get the right resources to your child. Levine recommends attending local seminars or going to the bank and asking someone there to discuss with both of you. You might also want to consider reaching out to your child’s school and requesting that they start a financial literacy program, she says.
Earning: At this age, your child might have started a part-time or summer job and could be earning her own income. Open up an account at a bank or credit union, if you haven’t already done so. Golden recommends not doing electronic transfers or getting a debit card right away. You might want to make it a joint account, so you can monitor her spending activities.
Spending: New laws make it unlikely that your child can get her own credit card, although you still have the option of being a co-signer. Levine says she thinks it’s unnecessary for anyone under 18 to have a credit card. While debit cards or prepaid cards are good options for many teens, it’s important to explain to your child the difference between these cards and credit cards. The way the cards work behind the scenes is very different because prepaid cards and debit cards don’t have penalties, won’t charge interest and won’t help build credit.
Saving: Golden says to pair a checking and a savings account when opening a bank account so your child learns to associate the two together. Then encourage her to transfer a percentage of her income from checking to savings.
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