I’m only now learning habits that I wish I had when I was entering adulthood. I think I’m not alone here, but if I had these habits when I was young, I’d be pretty well off now.
Because of that, I plan to teach my kids about money, to give them the value of money, to teach them skills and habits that will get them off to a good start, and to have them learn by doing, and from my example.
As I’m late in learning some of these things myself, I’m also starting late in teaching my kids these habits and skills. However, it’s better late than never. What follows are some of the things I’m trying or have planned.
Teaching kids about money is a controversial thing — no one argues that you should teach them, but the how is a tougher question. In general, I recommend four guiding principles:
- Educate yourself. You can’t teach something you don’t know about yourself. Learn as much as possible about budgeting, about saving, about investing, about cutting expenses, about reducing debt. Armed with knowledge, you’ll be a good teacher.
- Set a good example yourself. It’s one thing to tell your kids something, but if you are doing the complete opposite, they’ll learn more from your actions than your words. To teach them about controlling spending, you have to do so yourself. Lead by example.
- Teach them one habit at a time. Your kids are not going to become skilled financial planners overnight, or in one month, or even in a year. Your goal should be to teach them these lessons over the course of their childhood and adolescence. So teach one thing at a time, until they’ve learned the skill, and then move on to the next. There’s no rush.
- Let them learn by doing. You can’t teach by telling. You have to tell (briefly), then show, then let them do. Let them make mistakes. And then talk about those mistakes. Soon enough, they’ll learn why those mistakes were actually mistakes, and if you set it up right, they’ll learn better habits on their own, by doing.
So with those principles to guide you, here are 10 valuable lessons you can teach your kids about money:
- Give them control of money. If kids don’t have control of money before adulthood, they learn that money will always be provided for them, that they don’t have to be responsible for their spending or their future. And when they finally get control of their own money, they apply those lessons, by spending liberally and not worrying about the future.
Instead, give your kids control of money. I suggest taking some money that you already have in your budget, and giving them control of it. For example, if you currently spend $200 a month on eating out (to use a random figure), perhaps give your child control over $50 of that. And do the same for clothing and toy spending — don’t add to your budget, but allocate portions of your budget to them. Give them complete control over that money.
The result will probably be that they spend too much on frivolous stuff. At first. But when they want other things, they’ll have to learn to save for them, and cut back on other areas. Eventually, they’ll learn how to make decisions, through trial and error. It could take awhile, but it’s better they learn now than when they’re adults.
- Teach them to save for money goals. Once they realize that there’s more to money than just spending on whatever their latest impulse is, they’ll want to buy something larger than the amount they have on hand. That’s when you teach them about savings goals.
“You want to buy an Xbox 360? Well, let’s find out how much that costs. Now that’s how much you’ll need to save. If you take $40 from your monthly budget, you could have that in 5 months. If you take $60 from your monthly budget, you could have it in a little over 3 months. But either way, that will mean cutting back on McDonald’s and buying little toys every weekend.”
You might also create a chart on the computer, that shows their goal, and little savings milestones along the way. That way they can get excited about watching their savings grow.
- Teach them that reducing expenses makes goals come faster. This goes hand-in-hand with the above lesson, and if you teach them about savings goals, they’ll probably learn this lesson on their own. It’s common sense, and kids are smart enough to figure it out: if I want to get to a goal faster, I have to save more … which means spending less on other stuff.
But it’s worth reinforcing with a discussion about spending and saving, and by talking to them about the decision they’re making every time they spend money.
- Teach them how your money can make money. This is the lesson on investing, and it’s a lesson many of us can learn. It’s one thing to save, where you get perhaps 5% interest. But if your kids are going for short-term goals, they probably won’t see much compound interest happening. You’ll need them to make a longer-term goal, such as a trip once they graduate, if you have a teen-ager, or a down payment on a car, or even something a little smaller. Whatever the goal, teach them about how they can put their money in certain investments, and how those investments will grow over time.
That growth is their money earning money for them. It’s free money, almost, but the cost is not spending on other stuff in the meantime, and getting into the habit of investing the money. And it’ll help them get to their goals faster.
- Teach them about creating a budget. It doesn’t have to be a complicated budget, but what you really want to teach them is how to plan their spending, instead of having a big wad of cash that keeps getting smaller with every impulse buy. Something simple, like $30 for savings for a bike, $30 investing for a longer-term goal, $20 for a birthday gift for mom, and $30 for spending. Then teach them how to split the money up and how to keep within those planned amounts.
Make it simple and easy, so they don’t grow up thinking that budgets are hard and onerous (like many of us grew up thinking). If they get into the habit now, it’ll pay off huge when they grow up.
- Teach them to pay bills. Does your teen-ager have a cell phone? Who pays the bill? Give them the amount in their monthly budget, and allow them to pay the bill each month. If they’re late, the service will be cut off. They’ll learn to pay the bill on time. Other bills could include a car (when they’re of driving age), cable TV, Internet. If you let them pay any of these bills, you’ll probably want to monitor them to make sure they’re actually making the bills.
- Teach them about the dangers of debt. This probably isn’t a lesson they can understand when they’re 6 years old, but when they’re teen-agers, they can grasp the concept. You’ll need to discuss things like loans, credit cards and other debts. If you want them to learn by doing, you can have them take out a car loan or get a very limited credit card (that they pay for). They’ll soon learn that paying debt payments reduces how much they have to pay for other stuff, and how the debt payments can get to be overwhelming.
- Teach them that earning more money gets them closer to their goals. If you have a savings goal, you can reduce your expenses to get there faster … and you can also earn more money. They can start learning this lesson at a young age, by earning extra money (not from chores, as they need to learn to contribute to the household without expecting pay), but from extra projects, such as doing yard work or babysitting for the neighbors, washing people’s cars, etc. Later, they can get a part-time job to pay for a car or any other goals.
- Teach them about advertising and consumerism. This is something that should be taught at home and in the school, because most of us grow up without really being aware of the effects that advertising, marketing and consumerism has on us, and on our spending. This is often the root of our financial problems, whether we’re young or old. Teach them about the goal of advertising: to get us to buy their products or services, and to get us to spend our money. And show how advertising affects us, and gets us to do that. And talk about consumerism, and how it hurts us financially, how it’s not good for the environment, and how it leads to a cluttered house full of expensive and wasted stuff.
- Teach them about impulse buying. Closely related to #9 above, of course, impulse buying is the effect of advertising and consumerism. Teach them about pausing before buying, recognizing the signs of impulse buying (increased heart rate, heavy breathing, other similar body signs), using a 30-day list before buying anything that’s not completely necessary, avoiding shopping malls and online shopping sites, and reducing your need to keep up with others and buy prestige things (cars, clothes, shoes, gadgets, etc.) to look good in the eyes of others.
- Save for a rainy day. The cornerstone of healthy personal finance is also something many people struggle with: saving money. From the time your kids are old enough to desire toys, books, and other entertainment items, you should teach them how to save for the things they want to buy.
An allowance is a good tool for this concept. Your child may want a video game that costs $50, but she gets an allowance of only $5 a week. It's her choice: candy or comic books today, or the more expensive item a couple months from now. Almost all personal finance boils down to this essential concept, and it's best to learn from experience.
You can help with this notion another way, by offering to pay interest if your child saves part of her allowance with you, or by matching part of her savings if she starts a bank account - say, you'll contribute 1 dollar for every 5 she puts in the bank. Offer a high rate, so she can immediately see the benefits of not spending her money. Your child may find that momentary desire passes, but the satisfaction that comes from saving money lasts indefinitely.
- Work hard for your money. Help your child make the connection early in life that money isn't something freely given, but is earned through work. This isn't to say that you should put your small children to work re-roofing your house. Instead, just emphasize that nothing comes free, even if you're tempted to bestow upon your offspring everything that their hearts desire. If you choose to give your kids an allowance, tie it to the successful completion of certain jobs throughout the week. Or you may choose to set a market rate for various tasks.
Age-appropriate chores and rewards are the key. Younger kids can help with simple things like setting the table, where doing the job well isn't as important as learning how to see it through. Older kids can take on more arduous jobs like mowing the lawn, in exchange for greater compensation. You may even encourage them to begin offering their services around the neighborhood.
- Understand a budget A budget is a foreign concept to kids (and, it should be said, to many adults). Younger children, especially, simply won't realize that mommy and daddy have a limited amount of money to spend every month. But learning what a budget is, and why it's a good idea, is one of the central pillars of financial literacy.
The best way to teach kids how a budget works is simply to show them. That's not to say that you should open your books up to your children and show them every penny coming in or out (although you may consider sharing some details with teenagers about things like your mortgage payment, car payments, and so on). Instead, just give them a broad sense of how adults have to divide up their money each month.
One easy way to demonstrate this concept is to take a stack of Monopoly money, and tell your child that the stack represents how much money you make every month from work. Then, divide up the bills one at a time to show how much you spend on the house, how much you spend on food, how much you save, how much you give to charitable organizations, and so forth. The denominations aren't important. What's important is showing your children that you have a conscious plan for your money, and that you're on top of the family finances.
Encourage your child to start a budget of his own: Part of his allowance should go to savings, part to charity, and part of it is just for fun. Help your child indentify what he truly values, and budget his money accordingly.
- Embrace the power of compound interest There's an apocryphal tale that Albert Einstein, when asked to name the most powerful force in the universe, answered "compound interest." While the story may not be true, the concept certainly is. Compound interest simply means that the rate at which your money earns interest increases over time.
You can teach your kids about the power of compound interest with a simple exercise. Put a penny on one side of a table, to represent an account bearing compound interest, and a dime on the other side of the table, to represent an account bearing simple interest. Ask your child which will grow to a dollar in fewer steps: the penny, if you double it at each step, or the dime, if you add an additional ten cents at each step.
Need a hint?
Simple Interest Step 1 $0.01 $0.10 Step 2
$0.02 $0.20 Step 3
$0.04 $0.30 Step 4
$0.08 $0.40 Step 5
$0.16 $0.50 Step 6
$0.32 $0.60 Step 7
$0.64 $0.70 Step 8
The penny, representing compound interest, has grown to $1.28 by the eighth step. The dime has become only 80 cents. The difference will only continue to widen. This will help your child to learn the importance of giving her money the time to grow in an interest-bearing account. What starts off as a little bit of interest will, given enough time, eventually become an enormous amount. The earlier you start saving, the better.
- Beware of credit Credit cards can be valuable tools in a healthy financial lifestyle, but kids need to be taught from an early age that credit cards are not free money. Here, again, you can give age-appropriate lessons in how credit works by simplifying the concepts and acting as your child's bank.
If your child wants an item that costs $20, you'll agree to extend credit, under the following terms.
* There is a grace period of one week, after which the interest will start to accrue.
* The interest rate is 20% per week.
* The minimum payment is $5 (or whatever her allowance may be).
How will that work out?
Interest Accrued Minimum Payment Week 1 $20.00 $0.00 $5.00 Week 2
$15.00 $3.00 $5.00 Week 3
$13.00 $2.60 $5.00 Week 4
$10.60 $2.12 $5.00 Week 5
$7.72 $1.54 $5.00 Week 6
$4.26 $0.85 $5.00 Week 7
$0.11 $0.02 $0.13 Total $0.00 $10.13 $30.13
You can adjust any of these lessons to suit your own kids and circumstances. No matter what, teaching your kids about money now will pay off later.
Capitate Your Kids: Give Your Kids a Financial Head Start
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