This is a guest post for Skills You Need.
Want to contribute? Find out how.
How to Teach Your Kids About Money
How old were you when you first learned about money?
If you're like many of us, it was when you went to college and got your first credit card.
But learning this way is learning by trial and error. And you probably want better for your kids.
That's why it's important to teach your kids about money while they’re young. When kids learn about money from a young age, they can start building wealth that will accumulate over their entire lifetime.
In this post, we’ll cover some simple adjustments you can make to your life to start teaching your children the value of money.
The Value of Money
Kids who don't understand the value of money are likely to have unrealistic expectations. These are the same kids who expect a toy every time they go to the store.
And it's not their fault. It's up to us as parents to teach our kids the value of money.
Getting children to do chores for an allowance allows us to do this. When kids work for their own money, they have a better understanding of what it takes to get that money.
As parents, we can also talk to our kids about the value of money to reinforce those values. Talk about how our money is earmarked for wants and needs. And how everyone has a responsibility to manage their money to account for both their wants and needs.
How to earn money
Were you responsible for chores as a kid?
It's common for children to do chores in exchange for an allowance. And this is a step in the right direction.
But to get the most out of them earning an allowance by doing chores, you need to make sure you're doing it right.
Make sure the allowance and the chores are appropriately aligned. For example, you don't want to pay $10.00 for doing a days’ worth of dishes. This isn't meant to be easy money.
How much is right?
Here's a tip for trying to figure out what to pay your children for their chores:
- Research what you would pay an outside source to do that same chore.
- Cut the amount in half or in thirds (this is a chore for your kids, not a career)
Once your child gets into a schedule of doing chores every day and every week, it's time to teach them how to spend that money.
How to Save Money
In order to prepare your kids for when they have their own bills to pay, teach them how to start saving money now.
To keep it simple, use the rule of thirds. The rule of thirds mandates that you split your money into three categories: long-term savings, short-term savings, and spending.
How to spend money wisely (including avoid impulse buys...)
This part of the lesson has a lot to do with your own behavior.
Children learn by example, so it's important to set a good example with your own spending habits. Avoid impulse buying whenever possible. This includes toys for the kids.
Whenever you buy something fun for your kids, make it a planned event.
Everyone should have a general idea of what you're going to buy and how much you're going to spend. This way, when you get to the store, there are no surprises. There are no impulse buys or upgrades.
How to track spending
If you want to teach your kids to manage money wisely, they must learn to track their spending.
This part is easy, but it requires consistency.
Keep receipts or a log of transactions and review them periodically with your children. In these sessions, you want to talk about your savings goals. Talk about how close you are to meeting savings goals and whether you’ve followed through on your plan.
This is a good time to correct course if your children have gone off track.
Educate on credit concepts (including knowing the dark side of credit cards)
When your kids reach about the age of 10, you should start talking about the importance of a credit score.
They should understand the basics of a credit score and how it will benefit them in the future. A big part of this is understanding how to use a credit card wisely.
No one is recommending getting your 10-year-old a credit card. At this point, you can show them how to manage credit by showing them how you use your own credit cards.
If your kids understand how to build and maintain good credit from an early age, they'll be ready to get the best deal when they finally finance a car or get a home mortgage.
Give Them the Responsibility of a Bank Account
Now that your kids understand the value of money and how to save, it's time to set up their first bank account.
For them to get the most out of this experience, you must remain very involved.
Reinforce the importance of savings goals, and counsel your children on when it's OK to withdraw money.
How to invest (including compound interest / how to get them to save for college)"
As soon as your kids have the basic concepts of savings down, it's time to start investing.
This could be a fun game for kids as they learn how their money can grow.
Let’s say your child invests $1,000 at the age of 10. At an 8% interest rate, they will make $80 at the end of the year. Not so impressive…
But if your child leaves that $1,000 in the investment account for 10 years, it will more than double with compound interest.
Based on this simplified example, they will have $2,158 in the bank on their 20th birthday – without investing another penny.
Imagine if you had started investing this young…
When you teach your kids about money from a young age, healthy habits become second nature. And this is indeed the best way to set them up for a successful adult life.
How are you teaching your kids about money?
About the Author
Trevor is a freelance writer and recovering addict and alcoholic who's been clean and sober for over 5 years. Since his recovery began, he has enjoyed using his talent for words to help spread treatment resources, addiction awareness, and general health knowledge. In his free time, you can find him working with recovering addicts or outside enjoying about any type of fitness activity imaginable.