Teaching Money Sense to Kids

If you have children in your life, eventually they will grow up and obtain money. How they deal with it now can depict their financial future.

Teaching money sense is just as important to children as other life skills. There are many aspects to earning, saving, giving, and spending that they need to observe to guide them into their adulthood. Many of today's adults are not money savvy, and it shows with increased consumer debt, high-interest credit cards, and substantial mortgages.

It is your job as a parent to prepare the future generation with the tools they need to be successful in every aspect of their life. Personal finance knowledge is one of these vital tools.

Keep it Age-Appropriate

Your six-year-old will not understand compounded interest on a credit card or the value of a retirement income. But there are other aspects of money that you can share with your child to help guide them in the right direction. Teenagers are the perfect age to start explaining items like car insurance or NSF fees on a bank account. Keep your lessons age-appropriate and make them personal to your child so they will have a genuine interest in the topic.

Give Your Child an Allowance

By providing your child with an allowance, you are mimicking an income for them to start managing on their own. Many parents will give their child a small, base amount of money per week, and if the child takes on additional household chores or duties, they can increase the amount received.

Let your child spend or save their money as they wish, although this may be hard for you and them at first. They may soon realize that money does not stretch as far as they would like, and they will need to save up for big-ticket items before purchasing.

Teach Your Child to Save, Spend, and Give

Your child will need to grasp the concepts of spending, saving, and giving at some point in their lives. It will be better coming from their parent at a young age. Sometimes it is easier for a child to do this by using three separate glass jars so they can visually see their money. Piggy banks are great ideas, but children cannot see how effective their savings is developing through a colored piggy bank.

Your child should not only spend their hard-earned money, but also save some, and give a percentage away. These fundamentals are important aspects of becoming an adult and will come in handy later in life.

Model Good Spending Habits

It is one thing to teach all the fundamentals about personal money management to your child, but it’s entirely different if you are not following these guidelines yourself. Children will model what they see, and if your spending habits are out of control, they could adopt these choices as well.

Help Your Child Learn How to Spend Better

Everyone loves to spend money buying things for themselves. But when you find a sale or a great deal, it can be even better. Teach your child about some tricks to spending their money, including:

• Watching for sales

• Checking the Sales rack first when shopping for clothes in a store

• Price comparison and shopping around with different stores for the same item

• Using Second-Hand or Consignment stores as an option to high-prices department store items

By showing your child some healthy habits to minimizing the amount you spend on items, they can learn how to shop savvy and make their dollar stretch even longer.

Include Your Child in Discussions About Finances

Many children do not even know that their parents pay for power or water each month. They have no idea how vehicles are purchased and what it entails to make regular monthly payments. When you receive your utility bills in the mail, show your child how much it costs to power a home with lights and television. By having something concrete to reference, your child will understand that turning off the lights in a room can save money each month.

Teach Your Child About Healthy Credit

This is an essential aspect of money management that many adults cannot control themselves, unfortunately. Help your child understand the process of obtaining credit cards, lines of credit, and other finance methods and how they can be helpful or harmful. Make sure your child understands that credit cards or lines of credit are not free money but will, in reality, cost more in the end.

Give your child the information they will need to make good credit choices later on in life. Explain the difference with lines of credit with low interest and credit cards with higher interest rates. Let them know that having healthy credit will benefit them in the future when it comes time to obtain a mortgage or apply for an auto loan.

Make sure your child knows that making minimum payments on a credit card will not decrease the balance quickly, and they will spend more on interest payments than the principal amount. Many credit card statements will depict a timeline that states it will take a specific amount of time to pay the balance if only the minimum payment is submitted each month. This longevity can be a real eye-opener for many teenagers.

Teach Your Child to Save

Right from the start, teach your child to save a portion of any money they receive. Allowance and birthday money gifts are great ways to give your child a chance to start saving. While some suggest saving 10% of any money received, you may want to consider getting your child to save 1/3 of all money received. This number may seem high, especially for a child, but there are good reasons for this.

By putting 1/3 away immediately, your child is becoming accustomed to forfeiting income for taxes. Many working adults will pay approximately 30% of their income to the taxman each year. 1/3 is also a simple amount to work with when your child has to spend, save, and give. Each jar will get an equal amount of money, and there is no confusion.

This amount, although it seems higher than needed, will give your child increased savings quicker than 10% would, therefore reinforcing how easy it can be to save. Many children can become discouraged from saving money if it takes a very long time to save up for that special purchase that they want. 1/3 of savings will help them achieve this goal quicker.

Include Your Child in Big-Money Decisions

One example of including your child in a big-money decision is an upcoming family vacation. Help them understand how much hotels and meals out will cost for an entire week. Get their thoughts on cheaper meal ideas or bounce around ideas on less expensive holidays that will still be fun but cost a lot less.

If you both have your heart set on a luxury vacation, let them know it is possible, but with some sacrifices along the way. Maybe your family will not buy Christmas gifts or forego a summer vacation this year so you can go on a big expensive trip next year. Finding common ground and including them in the process can make a world of difference. You may find that your child will be more engaged and excited than they would usually be on a family holiday since they had a part of the planning process.

Break it Down for Them

Many adults think that their children will not understand money and finances and are reluctant to explain it to them. But surprisingly enough, children are quite intuitive and can grasp many basic financial fundamentals when given a chance.

Some parents will not let their child know how much money they make, while others are quite open about salary or hourly wages with their child. How you approach the subject is entirely up to you. Many kids think that money is never-ending, and if you don’t have any, all you need to do is put your card in the ATM at the bank and take out more to solve the problem.

You could begin by explaining that all the money you make each day is enough to cover the mortgage, utility bills, groceries, and auto maintenance. Additionally, you are also continually saving for things like birthday gifts, Christmas, family vacations, and unforeseen expenses like a broken water heater. Money does run out, and it can cause major problems if there is no money in the bank if you need it.

Keep it Simple

No matter how you approach the subject of money with your kids, it’s best to keep it simple. If you make it too complicated, they will become disinterested and will not remember or absorb the useful information you are trying to give them. Answer their questions as simple as possible, avoiding any complicated terms they won’t understand, and be open to discussion when they need it.

By keeping the lines of communication open and involving your child in budget and finance discussions in the household, you are sure to give them a healthy understanding of how money works and what financial responsibilities they will need as they grow into adults.