Parents can be good role models when it comes to teaching kids about money. Teaching children the benefits of saving, making good choices about spending money, and understanding the importance of good credit can put kids on a path to financial success.
Teaching kids about money is one of the best educational foundations parents can give. And if you’re a money-savvy parent, you may have all the skills to put your children on the path to financial success.
The best way to start: Be a role model and lead by example so the financial advice comes naturally. Sometimes it’s important to have specific financial discussions, too. Not sure how to teach kids about money? Here are five lessons to consider.
Robert Siuty, a senior financial consultant at TD Ameritrade, explained that parents can structure allowances so they’re tied to chores and other tasks, rather than freely given. “The problem with just being given money is there’s no back end where you have to do something to make it happen,” he said.
Make it specific to the child. When giving money, parents should directly explain how the funds are tied to the chores. “You can tell them: ‘You did the right things, you hit your task, met your expectations, and here’s your reward for it,’” Siuty explained.
Further, Siuty noted that rewards can be structured so certain tasks have a higher value than others, and compensation can be weekly, monthly, or anytime that’s appropriate. It doesn’t always have to be monetary. “It can be a play date, or maybe they get to see a movie if they complete a number of tasks over the course of a month,” he said.
When explaining savings concepts to young children, Siuty suggested using clear jars so they can see the money. “If the money is physically in their hand and if they see the money going in and out of the jars, it’s more impactful and it makes them think twice,” he explained.
He also suggested encouraging friends and family to give monetary gifts for birthdays or holidays that can go toward larger goals or experiences to teach the idea of savings targets. “It’s the repetition and getting them into that mindset of ‘this is birthday money,’ or whatever, and instead of spending it, ‘I’m saving it for my first car or buying that iPad,’” he said.
As children grow older and understand those concrete money lessons, parents can teach children to save by using apps. Apps allow children to track their savings over the course of time, and they open up conversations about how to spend money and delay gratification for larger purchases.
Those conversations can segue into the third lesson: how to spend money. This is where parents can introduce the concept of money management for kids without having their young eyes glaze over.
Siuty explained that spending discussions should start with younger children using money in their glass jars: “I broach it from the standpoint of if they really want something, they can spend their own money for it.”
This gives children some autonomy over how they want to spend their money and the perspective of buying now or saving for something larger. “You can talk about the different things they could do with that money, besides spending it on frivolous things,” he said.
Greg Hammer, president of Hammer Financial Group, suggested that when kids are old enough to have savings accounts, it’s an opportunity to help them understand what the statements mean and how they change when they use their dollars.
Teaching the importance of good credit is a key lesson for parents, especially because this isn’t a concept taught in schools.
“Teach your kids early on the importance of paying their bills on time, the importance of not overextending themselves, and that they’re building that good credit and how that good credit could impact them later on,” Siuty said.
Hammer suggested starting with a small credit card to give kids the experience of using it. Then parents can start to explain the differences in the types of debt: good debt, such as debt used to increase equity, like buying a house; and bad debt, from overspending on unnecessary items put on credit cards.
Many students in college will receive credit card offers, so teaching these lessons while kids are still at home could keep them from going into debt later. Also, it may be worthwhile to discuss parents’ own negative experiences with credit card debt as a cautionary tale.
A recent study published by the National Bureau of Economic Research found that parents’ attitudes toward debt can significantly influence how children think about and approach borrowing money as adults. For example, parents who fret about debt or show discomfort about it tend to have children with similarly cautious views. Children who grow up in homes that are more comfortable with debt, by contrast, may be more open to borrowing.
In a society where there’s always a latest and greatest item to buy, it can be easy to succumb to overspending. Advertising, marketing, fashion trends, and peer pressure can adversely affect financial decisions. This is why teaching kids about money is important.
Hammer explained that reinforcing the lessons of the value of money, what those dollars mean, and how they’re earned can help children understand the differences between necessities and luxuries. One way to reinforce those lessons is to expose children to the different financial realities for people not in their social groups.
Using an example from his own life, Hammer described how during the holiday season his church supports families in need. Hammer’s children will shop for other kids, often using their own money to buy gifts. It’s a chance to explain that access to luxury items is not an entitlement, and that not everyone can afford to buy the latest dress, electronic gadget, or take expensive trips.
“It’s really having them understand that, hey, we might go on nice vacations, but not everyone gets to do this,” he said.
When it comes to teaching kids about money, the combination of leading by example and explicitly explaining why it’s important to save, have good credit, and be mindful of spending can put children on the path toward financial success.
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