Financial literacy for kids should be foremost on the minds of parents in this new era as the world is changing so fast. The goal of teaching kids about money should be future financial freedom. Here are ways to ensure that you leave your kids a lasting legacy by teaching them the value of money.
Teaching Kids About Money:
Teaching about the value of money from an early age is crucial. A lot of adults grow up with zero parental advice. Their parents pass nothing of value to them, and they, in turn, do the same with their kids.
The first step in teaching kids about money is to educate yourself. That’s right, teach yourself first. If you are terrible at money management, how can you expect your children to have solid financial responsibility abilities?
Children are like sponges, they will absorb what they see displayed by their parents, be it good or bad habits. You should teach by example. Read up on financial inspiration and accumulation. Do not count on schools to teach your children.
How to teach your kids about money management:
Teaching preschoolers about money:
Start simply with something as basic as a money jar or piggy bank. This is a good way of teaching preschoolers about money. Half of any money they receive, either as gifts from family or from doing their chores should be deposited into the jar. Nothing is better than seeing their money accumulate to motivate them.
Teaching students about saving money:
As the children get older, switch from a money jar to a bank account. This can be achieved by either opening up an account for them in a brick and mortar bank, or even online with a virtual bank, such as ING (you might need to have your name on it as well). Again, the fact that they can see their money grow will serve as a reason to keep saving.
Teaching your kids about money: Offer Incentives:
In order to keep them even more motivated, offer the incentive by kicking in a parental match. Think of it as matching a 401k or retirement savings plan where your employer matches a percentage of your contribution. The amount you match is up to you, but you need to hold yourself accountable. Don’t be surprised if the kids put in more than half of their earnings just to see it grow faster.
Teach them about wants vs needs. Before they splurge out on impulse buys, encourage them to instead reach for delayed gratification. For example, instead of buying the latest console, they could instead save for something they actually need and would get more use out of for a much longer period, whatever that might be.
Friendly competition: Teaching kids about money management
Kids love to compete. You can make saving money even more fun for them by having a friendly competition among siblings and/or family members, even you, and with the “winner receiving” a gift at the end, perhaps, a much-wanted game, toy, etc. The lesson learned is that saving money can be fun.
Money Management For Kids: Wealth Accumulation
In the old days, banks paid interest on savings. These days, one is lucky to find banks that pay any sort of substantial interest, so the needle barely moves on your savings. As the children get older and can understand a little bit more complex things, you can kick financial lessons up a notch by teaching them about investing, and earning dividends.
A good way to do this is by opening up an investment account for them and purchasing company shares. It is important to show them that the markets can swing both ways, up and down and that investments carry risks of diminishing returns. This way, they can manage their expectations.
This can be accomplished by showing them graphs of how the companies have performed in the past, with the swings and misses. A good idea is to have them think of companies they would like to invest in, and do their research. All their friends drink Coca-Cola? Research. Sony Playstations the rage? Research! It’s not only fun, but they are learning how to be financially capable.
Mutual funds accumulation is also a fantastic way to ease kids into financial literacy. It is often preferable as a way to lessen the stress of constant upkeep (within reason).
What are mutual funds?
Mutual funds are run by companies that pool together money from all sorts of people (investors) and use this money to buy stakes in bonds, stocks, and even debt. In turn, these companies pay dividends at set times during the year. You can buy whole shares, or partial and increase their holdings as their savings grow.
For kids who are not financially savvy, this is the better option as it does not require micromanagement, and offers more diversification within the same fund. For instance, the Coca-Cola or Sony stock mentioned might already be part of the fund.
This means that the probability of losing all your money when the market dives for instance is lessened as there are other companies within the fund that would show higher returns, so the balance is there, and less painful when the markets struggle. Teaching them that investment is the key to long-term growth is fantastic and will empower them.
Act as their Creditor when you teach your kids about money:
It is essential that you hold kids accountable for their actions. Part of being financially responsible is to learn that you don’t borrow money if you can’t afford to pay it back. If your child for example wants something that would drain his finances, and even a little extra from you, let him/her know the consequences.
Let them know up front that you will charge interest on the amount borrowed, and stick to that agreement. Seeing how much having to pay interest on borrowed money eats into their savings will hopefully make them think before they leap the next time. Show them on a spreadsheet the missed opportunity to have more money saved. Debt is a juggernaut and the best way to combat it is through education.
Celebrate wins of financial responsibility in kids:
Don’ forget to have fun. When the kids reach a milestone, don’t forget to celebrate it. A special meal, an outing doing something they love, and other little rewards that keep them motivated should all be included in teaching kids about money.
Remember that success takes time. Instilling lessons on financial responsibility is a lifelong habit that will serve them well as they get older. Not only will this make you proud as a parent, but it might also mean you don’t get boomerang kids who return home for economic reasons.
Are you teaching your kids about money? If not, remember, it’s never too late to start teaching all kids about money management.