Children are often not adequately prepared for a financially savvy adult life. Between a lack of formal education and bad habits at home, kids can often be set up to make some costly mistakes once they set out on their own. Therefore, it is essential that parents begin to instill financial values in their children and it is never too early to start.
The majority of children, like many adults, are more concerned with what their money can buy rather than how they can save money. Parents need to teach their children how to save, how to budget, how to pay bills, as well as how to deal with credit cards and good banking practices. By doing this, parents are helping their children by preparing them for a future of financial security as responsible adults.
Lead by Example
Above all else, the best thing parents can do to help their kids learn about money is to lead by example. If you already have children, you know they will often emulate everything that you do. In fact, they will also emulate things you never knew they were paying attention to and may wish they didn’t pick up on. The same thing happens when your children watch how you treat money.
Be conscious of how you’re treating your own money. If your child only ever sees you getting money out of the magic money machine (ATM) or swipe plastic when making a purchase, they may think that we can get money whenever we want or that the little plastic card is just a way to buy things without using real money. Obviously, you can teach them what’s going on behind the scenes with these transactions, but you have to make the effort to explain it. Otherwise they will have no concept of what it means to withdraw money from an ATM or to pay for things with plastic.
Benefit of Earning Money
Many parents provide their children with money upon request or as an arbitrary allowance or incentive. Although providing children with money may sometimes be necessary, it is usually better to associate receiving money with how we view earning an income. This way, children and teenagers become used to the idea that money is earned and not simply given when asked for.
In the case of teenagers who are legally permitted to work, encourage them to obtain a part-time job which won’t interfere with school or homework. Start off small by encouraging to rake the neighbor’s leaves or walk a friend’s dog. Babysitting is also an excellent option and can pay quite well. It doesn’t have to be a regular job, but even finding odd jobs that pay can do wonders for teaching your kid the importance of working to earn money and maybe even instill a solid work ethic at a young age.
Teach Your Children to Save Their Money
Most children are far more interested in the idea of instant gratification than in saving (heck, most adults are the same way!). This means that instead of putting their money into their savings account or piggy bank, they will want that new movie, candy bar, or toy. Whether or not they get an allowance for chores or have a job, children and teenagers should be saving a percentage of their paycheck, but they probably won’t do it on their own.
Teaching your children to save is a great way by which they can learn to appreciate the value of their money. Start off small, maybe 10% of the amount that they make. Have them put it aside or start a savings account for them. They probably won’t like it, but stick with it for a few months and then show how their savings has grown without negatively impacting the things they wanted to buy.
Keep this up for a while and eventually allow them to spend their savings on something more expensive that they have been wanting. This is their reward for continuing to save and it positively reinforces their saving behavior. This will have a far greater impact than just trying to explain to them that they need to save money for the future.
Teach Value of Budgeting
One of the most basic steps to becoming financially responsible is learning how to budget. You, as a parent, understand better than anyone. You already have to juggle all of the bills along with other financial needs. There seems to be no end to the number of expenses that come up each month. Although your children might not have to worry about these costs now, they certainly will in the future.
A great way to teach children about budgeting is to share with them how you budget. Although it isn’t necessary, or even advised, to go through each of your bills in detail, give them a basic idea of how you save each month. Or, if you don’t want to go into your specific income or bills, posit a scenario that they will understand and go through that scenario in detail.
If you want to take it one step further you can work with them to establish their own basic budget. Sit down with them and ask what their plans are for the money and start jotting things down on paper. You can show them that by planning ahead with what they want to buy they may see how quickly it all adds up and then change their purchasing priorities based on what they see on paper.
Debt and Credit
Teaching teenagers about the dangers of credit cards is perhaps one of the most difficult lessons. Unfortunately, too many young adults and not-so-young adults view credit as “free money,” which it certainly is not. They spend far more than they are able to pay, therefore accumulating hundreds or even thousands of dollars in interest over time. Credit card marketing is something that we have to deal with every day and young adults are a huge target for credit card companies who are looking for ways to generate revenue.
College age students are perhaps the most likely to fall prey to credit card debt. In order to make sure that this does not happen to your children, teach them about how credit cards work and how credit debt and interest accrues. Also, teach them the basics of credit scores, how they are calculated, and how a low credit score can affect their ability to receive loans and later buy a car or home. Use some online calculators to illustrate how long it can take to pay off debt when just making the minimum credit card payments and tally up all of the interest charges. Hopefully they can begin to understand that buying things on credit can end up costing far more than the item itself.
It’s Up to You
As a parent, you are the one who is responsible for teaching children about financial responsibility and how to manage their money. And remember, it is never too early to start these lessons. Far too many children never make it off the ground during their transition to an adult life as they are too bogged down by debt. Therefore, it is essential for these values to be instilled in them at an early age so that they are able to successfully transition to a financially independent and fiscally responsible adult.
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About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.