Contributor: James Larter
Financial education is a subject that is not often taught in schools. Yet it is one of the most important skills one can have right throughout life. It is crucial to start teaching your children as early as possible about money. On average, children adopt their money habits at seven years old. Here are seven tips to get them started on the road to financial savviness:
1) Get them involved from the start
As with any skill that children learn, it is important for them to get involved and learn for themselves. They will learn from their mistakes and take these lessons through life. Show them the different prices of items at the grocery store and let them make an informed choice about which item(s) they should purchase. Show them how purchasing one item means you may not be able to buy something else. They will start to build an understanding of money using this methodology.
2) Give them an allowance
Giving your child an allowance provides them with a measure of financial freedom. The amount that you choose to give them is up to you and you can then set the boundaries for future purchases (you can choose to give them a higher allowance as they grow up but then explain that you will make fewer purchases for them). This will provide them with the power and ability to make financial decisions about how they wish to spend their money. You can then teach them about the benefits of the next tip.
3) Teach them about saving money
Give your child a piggy bank and let them see how their savings add up. Offer them incentives for them to save their money from the tooth fairy (tell them if they keep their $5 for three months then you will add an extra $1 to their piggy bank). They will get excited seeing their money grow and planning what to spend it on. You will quickly see a switch from instant gratification to a more measured approach to how they treat their money.
4) Teach them about taxes, medical insurance, 401K employer contributions, etc.
If your child starts to receive an allowance in return for chores that must be completed around the house – cleaning their room, doing the dishes, laundry, mowing the lawn/landscaping, taking out the garbage/recycling, vacuuming, etc., – you can teach them that just as with any other job, there will be taxes, medical insurance costs, 401K contributions (and since you’re your child’s “employer”, provide him/her with an employer 401K “match”), etc., taken out of the “paycheck”. There are online templates that one can download and edit to create an “allowance paystub” that will take taxes and other pre-and post-tax costs out of the allowance “paycheck”.
5) Introduce budgeting
It’s important that children understand how to budget. This will help them to understand why you can’t buy them everything they ask for each and every month. Explain the concepts of income and expenditure and show them some of the expenses you must pay for every month. You can then introduce the concept of disposable income and explain that this is the money left with which to make those “fun” purchases.
6) Teach them about investing
This is possible for the slightly older child who understands more about the concepts of companies and organizations. Give them short, easy-to-understand lessons about how to invest money. Explain that investing money can earn far more than saving but also inform them regarding the risks involved. If they can grasp this, then get them involved in some of your investing decisions. You could even give them a limited amount of money that you are okay with potentially losing, such that they can invest it and learn via a real-world situation(s).
7) Set the example you wish for them to follow
Your children watch you and learn from your habits. It is incredibly important that you set a good example to show them how you manage money. If they see you budgeting and investing, then they are far more likely to follow you down this route than if they see you frittering away your hard-earned money.
Each of the above tips can be tailored for the age of your child. Obviously, younger children will have to focus on some of the basics but as they get older, you can introduce them to savings, funds, and pensions so that they learn about the impact of saving and investing as early as possible.