Perhaps the biggest financial stress when it comes to raising children is saving for college. However, long before parents send their children off to higher education, they need to instill in them a sense of financial responsibility. Many parents struggle to find meaningful ways to interact with their children about money, and some avoid the subject altogether. This approach becomes very problematic as children mature into adults and assume financial independence.
The following are some helpful tips for teaching children important financial lessons that will continue to serve them in their adult years:
Give children an allowance, but make them work for it.
One of the most traditional ways of teaching children about budgeting also remains an excellent strategy for instilling in them a good work ethic. Instead of giving children money whenever they ask for it, parents should give them a weekly allowance and hold them accountable for saving for the things they want to do and purchase, from going to the movies to buying a new video game.
Importantly, this allowance should not appear out of thin air but instead be a reward for doing chores around the house. Even young children can handle simple tasks like dusting the furniture. If children do not complete the chores, then they do not get their allowance. Some parents may want to institute a creative reward system that gives extra money for completing chores early or that offers the chance to earn extra income by completing side tasks.
Open a joint bank or brokerage account.
When children have their own savings account, they can see firsthand how quickly their money can disappear. Having his or her name on the account makes it more exciting for the child every time a statement arrives in the mail.
Together, parents and children can set certain long-term and short-term goals concerning the account. This teaches young minds how to keep track of their savings in a meaningful way. An example of a short-term goal is saving enough money for a new toy, while a long-term goal can be a more expensive purchase like a gaming system or even a car for adolescents.
Parents should also use the account as a way of teaching children about various account fees and costs. By exposing children to the concept of financial management at a young age, parents can help ensure their children will make good choices down the road.
Involve children in comparison shopping.
Most children are unaware of the fact that different stores charge varying prices for the same product. An important part of personal finance is finding the best deals possible, which may involve store-to-store research, online comparisons, and couponing. Of course, children are not interested in the majority of purchases that adults make, but parents can involve them in the fun purchases, such as ice cream. In fact, the ice cream aisle at the grocery store is a perfect place to show the difference between name-brand and store-brand ice creams. Establishing a budget for children to spend will teach them how to get the most for their money.
Be a good model for financial planning.
Children pay close attention to what their parents do, and part of educating them on how to make the best financial decisions is serving as a good model. To do so, parents need to spend their money wisely, institute a budget, and save adequately while planning for long-term and future expenses.
While many financial issues may seem too complicated for younger children, parents are perpetually surprised by how much their kids understand when parents take the time to explain what they are doing and why. Naturally, parents will need to simplify some processes and then add complexity as the children get older. Even very young children can get excited about investing when parents teach them what a brand is and what companies produce which products. For example, hearing about Apple stock makes more sense when a child knows that the company produces his or her iPad.
Let children make their own mistakes.
Sometimes, parents need to step back and let children make small mistakes that become important learning opportunities. For example, some parents may discourage a child from purchasing a certain expensive toy that will likely only get a couple of uses. While parents may want to make a comment about considering how often the toy will be used, ultimately the money and the decision belong to the child. When the kid does make the purchase and then only uses the toy a couple of times, the fact that the money was mostly wasted will become apparent and encourage the child to make better purchases in the future.
Involve children in financial conversations.
Likely, all children in a family will react to financial lessons in different ways. Parents need to pay attention to these differences and then use them to start a conversation about money. While talking about finances around the dinner table may seem tacky, it is important for parents to keep the lines of communication as open as possible and to encourage siblings to have their own conversations about the importance of saving and setting financial goals.
Some children will prefer to make a bunch of little purchases with their money while others may continually save for larger purchases. Similarly, some children may consistently ask for extra chores to make more money while others may be content to remain at the baseline. Parents can learn a lot about their children and themselves by asking about these preferences.