One of the most important skills that parents can pass on to their children is the correct and responsible way to handle money.
Why Financial Education Is Important
Financial literacy is one of the most important skills for building a successful life, but unfortunately, many adults do not possess it. Beth Kobliner, author of the bestselling book “Get a Financial Life“ and a member of the President’s Advisory Council on Financial Capability, points out that the mortgage crisis of recent years shows just how little financial knowledge most Americans have.Do you really want your children to make these same mistakes and have financial burdens for the rest of their lives? If you’re like most parents, you may respond with a firm no, but you may also argue that schools should teach financial literacy to students instead. Unfortunately, schools and the educational system as a whole aren’t going to do your children any favors either.
How Young Is Too Young?
You can start teaching your kids about handling their finances responsibly from a very early age. The key is to make these lessons appropriate to their level of intellectual development. While a 3-year-old might not understand the complexities of financial derivatives, they can certainly understand that if you give them $1 they have a choice about which piece of fruit to buy.How to Teach Your Kids About Finance
The most important principle in teaching your kids about finance is to take it slow, and make your lessons relevant to their everyday lives. This means that your lessons will vary according to how old your kids are.Ages 3–5
The best lesson to begin with, and one that even many adults still haven’t learned, is this: You have to save and wait to buy something you want.This is a key lesson for kids to learn at a very young age, and you can begin this process when they are still 3 years old. Young children can have a problematic association between going into a store and you buying presents for them.
It’s therefore important to point out to them that toys cost money, and that money isn’t unlimited. When you go shopping, you can explain to them that you are in the store for a particular item, and therefore you will not buy them presents.
- Create three jars, labeled “saving,” “spending,” and “sharing.” Whenever your kid receives money—even a couple of dollars—they can then decide which jar to put it in. The “spending” jar can be for buying sweets and other small items, and the “sharing” jar is for donations to charities or presents for friends. The “savings” jar is for more important items.
- You can also have your kid set a savings goal, such as to buy a particular toy, just make sure that they are being reasonable with how much they want to save up. They should be able to afford their present in a few weeks, not a year.
Ages 6–10
As your kids start to grow up, you can build on these lessons. Between the ages of 6 and 10, you can continue with the “jar system” we’ve explained above, and perhaps start to give them a little more in their allowance. Just make sure that you supervise their savings goals, so that they don’t get overambitious and start to have negative associations with savings.- You can include your kids in small financial decisions, such as buying products online. The average person already spends five hours a week shopping online, so there should be ample regular opportunities in your life for including your children in the buying and shopping process. You can explain that certain products offer better value for money, or the importance of taking advantage of sales.
- You can also start to give your child a little more autonomy at this age. For example, when you need to go shopping for new shoes, you can give your child money and allow him or her to select the shoes he or she wants within that price range.
Ages 11–13
Around this age, you can start to shift from short-term savings goals to longer-term goals. By the time they reach 11 years old, most kids will have an appreciation of how long a month is, and can start to conceptualize how long they will have to save up to afford something.Children around this age can therefore begin to get a basic understanding of how money and finances in the real world work. For example, children around this age can begin to understand concepts such as compound interest, how credit cards work, loans, debt, and income.
- Describing the idea of compound interest with real numbers, and not in the abstract. Research shows that this makes the idea much easier to understand.
- You can also show your child how to do some compound interest calculations on Investor.gov. Here, they can see how much money they will earn if they invest a certain amount and it grows by a certain interest rate.
Start Now
It’s never too early to start your kids on the road to success, and that includes teaching them about money and finances. The family environment is a great one for imparting lessons that your kid’s school overlooks, but also has other advantages.Talking about money with your kids from a young age will not only give them the habits and knowledge they need to manage this successfully in the future; it will also cultivate an openness that will mean that money is far less likely to be a source of family tension.