Instilling financial literacy in children is the best way to set your kids up for a healthy approach to financial management later in life. If children grow up completely shielded from the sometimes difficult realities of fiscal responsibility, they may have more trouble managing their own money when the time comes. Parents are usually well versed in the range of everyday skills necessary for children to be happy, healthy, and productive. But very little is discussed on most parent sites about what is required to teach young children how to manage money and develop a healthy mindset about spending and saving, and nothing matters more than developing habits in the early years that will serve as a basis for the future.
For entrepreneurs, this can be an incredible opportunity to include your children in your work. Children learn best by playing an active role in real-life situations. And your kids will gain a better understanding of what it is you’re doing all day. And if you work from home, this represents an even more exciting opportunity.
In 2015, PISA reported their financial literacy assessment, which found that 1 in 5 children do not meet baseline financial literacy proficiency levels. Why are some kids falling behind in this department?
While there could be a wide range of reasons as to why parents are reluctant to lift the veil on money management, the truth is that many people feel uncomfortable talking openly and honestly about money, even with their own kids. Previous generations were raised to believe that discussing money is in poor taste. But the reality is, the more you open your children’s eyes to potential financial hardships and ways to avoid them, the better prepared they will be to navigate them when the time comes.
If you’re looking for ways to teach your kids about finance, we have some suggestions here.
1. Encourage employment.
Nothing teaches a child the value of a dollar like hard work. When high school-aged kids are forced to hold down part-time jobs (often at minimum wage), they quickly learn the value of a hard-earned dollar that is received after a day’s work. Hard work and money are symbiotic, and the earlier kids learn and appreciate this dynamic, the better prepared they’ll be to transition into the full-time workforce.
Even in earlier years, children need to understand that money comes from somewhere (and not simply through a push of an ATM button). To make that point visible, give your child chores that result in earnings. Whether it is pushing the broom across the floor or picking up the playroom, the connection between work and earning will be more explicit if your child has to do something before receiving the reward of money. If your child fails to complete the required task, do not pay him. While the impulse to do so may be significant, no one gets paid if they don’t work, so it is important to make sure the child understands cause and effect.
Financial literacy requires a lifelong commitment to learning and adapting. But increased exposure from a young age to the realities of managing money will ensure that your kids aren’t blindsided when the time comes for them to pay their own bills.
2. Require (don’t ask!) them to save.
Giving a child money for work completed will show her where it comes from, but it will not help her understand how it accumulates. One of the best first steps to take when it comes to teaching your kids financial savviness is the importance of saving money. Requiring her to set back a certain amount from each “payday” will help her see, in a concrete way, how a “penny saved” is, quite literally, “a penny earned.” Putting money in a clear jar can make it even more visible to the youngest of children.
If your kid earns an allowance for helping around the house, or receives the occasional birthday check, encouraging them to put that money aside will help them understand that money doesn’t grow on trees and will make funds available later, when they are asking for something else. When your kid asks for a new toy or piece of clothing, telling them that they will have to pay for it with their saved or earned money will help them assume more discretion when it comes to deciding which objects are worth spending money on and which they can live without. Learning to delay gratification or choose not to purchase at all can be the basis for avoiding the pitfalls of impulse buying in the future.
3. Talk to them about investing.
While most kids are not necessarily interested in stock markets and day trading, exposing children to the benefits of investing in long-term stocks and bonds may encourage them to make similar choices of their own once they join the workforce.
Additionally, with the onset of cryptocurrency and initial coin offerings, kids may become interested in coin investing at an even earlier age. Exposing your children to digital cryptocurrency education resources and ICO lists will better prepare them to buy a few coins of their own. And, if they choose to go into business, they’ll be more savvy on how both local and international finance works.
Starting and maintaining conversations with your child about money should be part and parcel of raising a self-sufficient, healthy adult. When developed as part of an ongoing process, financial literacy can be as easy as developing a bedtime routine or preparing healthy meals.
4. Plan for college.
Likely, one of the major financial burdens your children will experience is college loan repayment. In 2017, student loan debt became a $1.3 trillion financial burden, affecting more than 44 million individuals. Many new college graduates — especially those who were not exposed to financial planning as children — are not equipped to manage the financial, and subsequently emotional duress that accompanies loan repayment plans.
Talking to high school-aged kids about the realities of college expenses may encourage them to make smarter decisions while in school and get in the habit of maintaining a strict budget before they are out on their own. No matter how much we teach children about money, it is inevitable that they will accumulate some debt over the course of their lifetimes. That said, utilizing some important money-saving strategies, like managing student loan debt will help them develop healthy habits.
5. Maintain control until they prove themselves.
When your child is ready to convert from paper money to the world of “virtual” money through the use of a bank account, utilize apps and resources that allow you to have insight into what your child is saving and spending. In addition to safeguarding your child, these help you understand what your child understands about converting real pocket money into the more abstract numbers in a ledger. Too many kids get in trouble because they do not understand that the values on paper represent real dollars that must be earned and paid back.
Providing your child with a low-interest credit card for which you serve as a co-signer can be used as a teaching tool and allow you to monitor how they use and repay credit. By reviewing with her the monthly statements, you can help your child understand balances, interest, the pitfalls of paying only the minimums, and the advantages of card reward systems.
6. Include them in budget conversations.
As most parents know, budgeting is the key to keeping household finances in check and avoiding long-term monetary disasters. You likely already budget your head when it comes to month to month and week to week examples, so why not create a budget you can share with your children. If you’re saving up for a family trip or trying to set aside more money for college funds and need to whittle spending down in other areas, write the plan down and share your financial strategies with your children.
Using digital resources like Mint will help you track of exactly how much you spend on food, gas, clothing, cell phone bills, etc. every single month. This is a source that is easily shared with children. The more kids see all of the expenses of daily life in one concentrated budget app, the more likely they will be to appreciate why budgeting is crucial.
As your child ages and can appreciate how saving, planning, and budgeting are put into practice, do just that in your kid’s life. If your child wants a new toy or purchase updated sports equipment, discuss your child’s long-term plan for getting the funds to buy it. Get detailed about how long he will need to save to make his goal a reality and what other activities or items he will be passing up to get the thing he has prioritized. Sustaining an effort in saving will not be easy at first, but the dedication that comes from accomplishing a long-term goal will make a lasting impression.
