Teaching your kids about money is an essential first step for future financial security. It might seem a little intimidating, but with the right tools, it can be easy.
Here are five simple, practical tips for giving your children a healthy financial foundation.
5 Tips for Teaching Your Kids About Money Management
Tip #1: Start with the basics when they’re young to build a good foundation.
There’s no set age that you should start teaching your child about money. However, personal finance commentator and journalist Beth Kobliner says a good rule of thumb is to “start when your child is old enough to say, ‘Gimme!’”
For children aged 3-5, Kobliner suggests you start by teaching them that:
- “You need money to buy things.” Kobliner suggests that you help teach this by using coins and identifying their value, then discussing how some things are free (like a hug or playing with friends) and others are not (like clothes and food).
- “You earn money by working.” To show this, you can talk about your work with your child or explain jobs you can see people doing while you’re out and about, like the mail carrier or grocery store clerk. And what better way to drive the point home than by a tried-and-true lemonade stand?
- “You may have to wait before you can buy something you want.” Break out a jar or two and label them for saving. Once your child has reached their goal, let them buy a treat.
- “There’s a difference between things you want and things you need.” Teach your child the difference between essentials and non-essentials. You can do this by having a conversation or completing an activity where your child only has a set amount of coins to sort into different circles labeled food, clothes, and optional items.
If you build a strong foundation, it enables you to teach your kids about more complicated financial concepts down the road — which brings us to tip #2.
Tip #2: Don’t forget about debt and credit.
Once your kids have the basics down, you can move on to more complex topics (when they’re old enough to understand, of course). In particular: debt and credit.
The subjects of debt and credit can be difficult to explain. However, it’s an integral part of money management education, according to financial planner Kelly Anderson.
“As plenty of kids end up taking out massive student loans to pay for college or using credit cards to purchase daily needs, learning about credit from a young age is critical,” Anderson writes in 5 Rules When Teaching Kids About Money.
Anderson suggests a simple exercise for introducing the concept of debt and loans to your children. Give them a small amount of money, letting them know that you’ll charge 5 percent interest after a given timeframe.
When their time is up, have them repay the loan — including interest. Then you can have them compare the amount they paid back versus the amount they originally borrowed.
Now, it might seem a bit silly to give a ten-year-old a loan. But you don’t want their first experience with credit and debt to be when they’re 18 and getting their first credit card, or taking out a much bigger loan than $10. It’s better to familiarize them with the concept so that they at least have a basic understanding of it before they’re grown.
Tip #3: Consider giving your child an allowance.
Not every parent chooses to give their child an allowance — and of course, there’s nothing wrong with that.
However, it can be an effective tool in teaching children that you have to work in order to earn money.
Did You Know?
A national survey on allowance by the American Institute of CPAs found that “61 percent of parents pay an allowance to their kids, with the majority, or 54 percent, beginning by the time their child was 8.”
The survey also tackled the question of whether or not children had to earn their allowances through chores. The findings indicated that most parents do require their children to earn an allowance, with 89 percent of kids expected to put in at least an hour of work every week. On average, the survey found that “children put in 6.2 hours per week on chores.”
Tip #4: Take advantage of tools and apps to help teach money management.
We may have the best intentions of teaching our children about money, but sometimes life gets in the way. Or maybe it’s simply that we don’t always know what’s appropriate to teach them at a given age, and what the best way to do it is.
That’s where tools and apps can help.
We recommend financial literacy games from Independent Community Bankers of America (ICBA). Kids can learn while they play and have fun with these free money skill games.
LearnVest also has a really great list of tools for teaching kids about money. They have it all broken down into age groups to help you help your child at every stage. It includes everything from board games to apps to websites.
Additionally, if you’ve opened an account for your child at your local bank, you can sign in online with them and help them monitor their funds. This is a great hands-on way to teach money management and watch their savings grow.
Tip #5: Teach them how to budget.
This is an essential money management activity. From a young age, you can teach your children how to budget and save.
For example, you might have already introduced the concept of saving to your child by having them deposit their money in a jar or piggy bank. The next step you could take is teaching them how to budget that money.
It’s easy to make this lesson sink in at different ages. When they’re young, have them complete a simple activity, such as dividing coins between different areas on a sheet of paper (like we talked about above). As they get older, try something like giving them a set amount of money for back-to-school shopping and let them choose their supplies.
When your children are in their teens, if their school doesn’t have a financial literacy program, there are plenty of resources online. You can try this financial literacy guide for teens for guidance on how to teach your teen about budgeting and money management.
Banking with Your Child
Financial literacy and money management skills start at a young age. If you’d like to open an account with Mercer Savings Bank for your child, you can visit us online or contact us today to get started.