Last week I did a post on children and allowance. It was such a hit that I thought I'd follow it up with some tips on how to raise a money smart kid.
If the idea of schooling your child in personal finance seems overwhelming, take heart. Instilling money literacy doesn't require a lot of planning or knowledge. Focus on the basics, like comparison shopping and the importance of planning and saving. When your child masters these concepts, they'll know more than many adults. In fact, according to a 2010 survey by T. Rowe Price investment company, fewer than one in five parents give themselves top grade for their understanding of fundamental savings and investment principles. The key is to start young and keep your talks kid-friendly.
As parents, we have to teach our kids so many things, and as they get older, we realize a lot of what they learn, we don’t even realize we’re teaching them… they’re learning by watching us! If we have good habits, then that’s great, but if we don’t have the best habits, we could be teaching them things we really don’t want to be. An example? If we’re trying to teach them about exercise and nutrition, but they never see us exercise, and all we eat is junk food, our kids are going to pay more attention to what they see us doing than what we tell them to do. The same can be said for financial habits; if our kids see us making smart money decisions, they’ll learn those good habits, too.
Below are some tips on how to teach your children the basics of money to give them a head start in money management and the skills needed to succeed in life. These are all things we can be explaining to them as we do them!
ATM'S DON'T GIVE YOU MONEY: Nowadays kids don't think money grows on trees; they think it comes out of ATMs. It's so easy for a child to assume that the ATM shells out money for free. As you drive up to the ATM, this is a perfect opportunity to explain to your child that these machines are like piggy banks. They hold your money and when you take some out, you have less for next time. How do you get more? By earning it.
CREDIT CARDS AREN'T THE ONLY WAY: Grasping the idea of a credit card for a child is tough. It basically looks (and feels) like "free" money. If your kids see you using credit cards for everything, they’ll think it’s normal and acceptable to do the same themselves. If you’re using a credit card to save points for a reward, explain that to them, and let them see you writing a check to pay the credit card company. Also be sure to show them the statement, so they can see the interest, and how it adds up to real dollars and cents.
CASH ACTUALLY STILL WORK: If you never use cash, ever, then your kids might think it’s not a good idea, and sometimes, it’s the best way to pay. Let them see you use cash, and better yet, let THEM pay for things with cash!
WHAT'S A BUDGET: Most of us didn’t see our parents paying bills, or balancing their checkbooks, so we had to learn about these things in an abstract way in an economics class, or worse, the hard way by doing it ourselves. Let your kids see you paying bills, and explain to them what you’re doing, and why. If you have a budget, let them see that, too, and see how paying the utility bill and cell phone bill fit into it.
GOING TO WORK: If your kids don’t understand why you go to work (to get paid), they might not make that connection on their own. If it’s possible, when they ask for a big-ticket item, show them how many hours you have to work to pay for it, and figure out how many days of work that amounts to.
CREDIT & DEBIT ARE DIFFERENT: In item 2, I said it was a bad idea to use credit cards all the time. If you use a debit card for most purchases, explain the difference between that and a credit card. Explain that it instantly comes out of your checking account, and let them see you enter that amount into your checkbook.
PRIORITIES: If your children don’t see you pay bills, or know how a monthly budget works, they might not understand financial priorities, like paying mortgage or rent first, then utilities, then car payment, then groceries, then savings, then fun money. This is a lesson they can learn early, and the earlier they learn it, the more natural it will seem when they need to start prioritizing their own spending.
IT'S OKAY TO WAIT: If you never let your children see you NOT purchase an item you want, they might get the idea that you, and they, can always get what they want, when they want, without having to wait for a sale, or for you or them to save the money. If they ask for an item, help them save for it, and let them know when they have the money for it. More Matchbox cars?? Sure, once you have enough saved… it won’t kill you to wait.
KEEP YOUR MONEY FOR SPECIAL THINGS: The goal is to help your child develop his own saving goals. Explain saving along these lines - "Every month we set aside money for stuff we'd like to have or do in the future. Eventually we'll be able to have enough for something special." Avoid steering toward something longterm like college. At age 6, he can't be expected to wait longer than a month to get what he wants.
BORROWING COSTS MONEY; SAVING EARNS IT: Compare a loan to taking out a book at the library and then returning it. But make the distinction that when you borrow money you have to pay what you owe plus an additional amount. That's why you should only take out a loan when you're buying that you need and can't afford to pay for all at once, like a house.
All of these lessons about money are so important for our kids to learn, and the best way for them to learn them is to see you doing them yourself! Which of these money lessons have you taught your kids? Are there others you think are important, too? Please let me know!