As parents, we try to do our best, and teaching our kids about money should always be a part of doing our best. This includes teaching them how to have a healthy relationship with money and how to value every dollar. Granted, this doesn’t come easy if you struggle with poor money management and overcoming unhealthy spending habits. If this is the case for you, don’t feel discouraged because you can implement many simple strategies into your life to teach your children the basics of financial literacy.
Laying a solid foundation starts early on in life, which could mean reducing your spending on unnecessary items such as excess clothing and the latest gadgets. If you start this early on in life, they will have a basis to build upon their skills, rather than learning the hard way as adults. Lacking knowledge of money makes life difficult to navigate and can cause ongoing financial chaos making life unnecessarily difficult.
According to research out of Cambridge University, money habits are generally set in stone by the age of 7. This is not to say that teaching your children later in life is fruitless; it means that your child will be learning new skills while undoing old ones. It is best to try avoiding this.
I know you want the best for your child, and if you are struggling with where to start, don’t let the fear of not knowing stop you. Below is a comprehensive list that will help you give your children the gift of financial literacy.
1. Stick with the basics
Like most things in life, the earlier you start, the better, and the same go for teaching financial literacy. When your child begins to understand what money is, you should teach them its fundamental purpose—exchanging it for goods & services. You can do this by allowing them to observe you making cash purchases at stores and restaurants. Get them involved in the process by showing them the bill explaining to them what everything means, and allowing them to compare prices to help them understand dollar value—doing this as often as you can, will instill the basic fundamentals.
Young children don’t understand where money comes from or how it is generated; therefore, they can’t piece together why labor is required to earn money in their developing minds. Use this as an opportunity to teach them that you go to work to earn money to buy groceries and pay bills. Explaining this can help them better understand that money is not unlimited; therefore, it should be used wisely.
2. Set solid examples
Habits are formed at a young age, so the clock is ticking when it comes to teaching your children positive and healthy money management examples. It can be challenging to do a complete overhaul of our spending habits as adults, but for the sake of teaching children about money management, it would be wise to do your best in setting solid examples. Below are a few ideas to help you get started.
- Bring them shopping with you and explain why you buy only what you need. This will help your children understand the value of healthy spending habits because they will learn to distinguish between needs and wants.
- Reduce the number of gifts you buy for them and others. When children grow up receiving as many gifts as their parents can afford to buy them, they learn that spending money on excess futile items is normal. Thus, they will pick up this behavior very early on.
- Include them in creating your monthly grocery list. As many of us know, grocery shopping has gone from being relatively affordable to a swelling monthly expense in recent decades. Creating a monthly list is a smart strategy to help you reduce your cost, and if you include your children in creating your lean list, it will help them understand how to shop for necessities only and that groceries cost money. A little tip is to add unnecessary items to the list to show them the total cost vs. the cost of a lean list that only incorporates essential items (and maybe a few treats! Learning doesn’t need to be boring).
3. Saving money should be a family affair
While some people argue it is unhealthy to expose your children to the household finances, that only holds weight if they endure stress rather than a positive learning experience. In this case, teaching your children how to save money by making it a family project should not stress them; instead, it will teach them two fundamental things;
2) money management
Don’t be afraid to get them involved, even if it means you need to set up a separate savings plan from your primary one that is simple enough for them to understand. How should you go about doing that? Below are a few tips.
- Purchase or make a piggy bank to save all the household change. Set monthly targets, which will teach them goal-setting. The goal doesn’t need to be substantial because the purpose here is to teach them about saving and goal-setting. They will learn these principles despite the goal amount.
- Offer saving incentives. What an excellent way to teach them that hard work pays dividends! For example, if the monthly goal is reached, an incentive can be to choose their favorite movie to watch on a school night! Or even better, a percent of the savings can be transferred into your children’s individual savings accounts if they have one. If you ask me, this is the best incentive!
4. Instill individual money saving habits
Teaching your children to save money on their own, without the help of mom and dad, will teach them financial independence, and this can be done in various ways.
You can begin teaching them individual saving habits by incorporating a few simple things into their daily life. It may be challenging to teach toddlers the purpose of saving money, but there are a few workarounds.
Have them pick out a toy they want, and together you can create a short-term goal by setting a deadline to reach this goal, attached to a dollar value. How will they earn money as a young child? It’s simple. If your children do chores around the home and are paid to do them, you solved their income problem. The next question you may have is, what if they don’t earn enough to pay for their toy? This is why it is essential to explain to them that the dollar value of the toy should be less than they will have saved. This is to teach them two things;
1) how to set realistic goals
2) how to save money after spending on items
The same strategy can apply to older children, but you can enhance it by opening up a youth bank account and giving them access to a bank card (ensure parental controls are added). Doing this will not only teach them the value of money and saving, but it will also teach them about digital money and how to manage cashless money.
Another great way to incentivize saving is to teach your children about matched contributions. Suppose they have a goal of saving $30 each month; if they reach this milestone, offer to reward them by matching a certain percentage of what they saved. Suppose they saved $30, and your commitment is to match 100% of the total; this means they will earn an extra $30 just for being committed to their goal. This strategy works for adults in the workplace, so it will undoubtedly work with children.
The purpose of teaching them to save is to understand the meaning of delayed gratification. Without this working knowledge, most people find will themselves in a cyclical financial mess, with no understanding of how to get out. Do your best to prevent this from becoming your child’s future.
5. Introduce them about investing and interest
Building wealth is not easy. We know this. Generally speaking, it requires much more than saving money. It requires saving a large enough percentage of your income so you can invest it and earn compound interest. Even more, you need to know where to invest your money, which is a challenge on its own. So, how do you teach your children this? It’s easier than you think.
Go to your local bank or a brokerage and speak with a financial advisor to inquire about opening up a custodial investment account for your child. You will be presented with a few options to choose from, so go with a plan that best suits your needs. Once this is set up and you begin receiving statements, you will incorporate your children by reviewing the statement with them each month. Focusing on the following two things will teach them about investing and interest; the monthly deposit amount vs. the accumulated monthly interest.
The purpose of this is to make them aware that allocating your money to an investment account will earn them extra money. This is the easiest way to teach children about interest applied to money. When they are old enough to understand the basic concepts, you can even gift them investing books to do some learning on their own time. Who knows, one day they might teach you about better investing strategies!
Moreover, having an investment account of your own is an excellent way to model healthy financial behaviors. As parents, we will yield some of the best results in our children by practicing what we preach. Children pick up on behavioral habits and adopt them as their own. Talk about your investments regularly and be open about the areas you do well at and areas you can improve on. Doing this can prevent them from going through costly trial and error when managing their accounts in the future.
Instilling financial literacy in our children is not a walk in the park; it can be difficult and takes a lot of consistent effort. But keep in mind, it pays off in the best way. It can ultimately change the path of their financial future and break a family cycle of poor money management. Wanting the best for our children is an inherent desire of all parents, and it is manageable with the right tools and a dedicated mindset.