Parents ask all the time, “Why don’t they teach kids how to manage money in school?” It’s a good question.
Money management is an important skill to have and there is a good bit to know. “The majority of your kids’ financial education will come from you,” said Kathy Longo, financial expert and author of “Flourish Financially: Values, Transitions, & Big Conversations.”
I asked Ms. Longo what advice she’d give to parents who want to make sure their children understand how to manage money when they grow up.
The Epoch Times: Why do you think it’s important that children learn to manage money?
Kathy Longo: All parents want their kids to grow up to be happy adults, yet most parents don’t realize how critical it is to teach their kids about healthy financial habits and values. Helping your children develop healthy money habits today will increase their chances for a happier life.
Finances play a critical role in life. We learn new lessons about money throughout our life, so it is important to build a strong foundation for children that will benefit them at all stages.
At a simple level money has four purposes: spending, saving, sharing with charities and others, and investing. How they decide to use money for these four purposes begins with the parents. Parents have a unique opportunity to exhibit healthy behaviors for their children at all stages of their development.
Building positive money habits partly requires talking about money, but it also requires using your actions to demonstrate how to manage it. Every day brings natural learning opportunities for parents to introduce and explain financial concepts to their kids.
Your children will benefit from these lessons throughout their life because finances can be very stressful when people are not able to take control over their money.
The Epoch Times: At what age do you think parents should begin teaching their children about money?
Ms. Longo: The sooner the better. Every conversation you have with your children about finances, regardless of their age, is a great opportunity to segue into a discussion about wants versus needs. Asking kids whether they want or need something before they make a purchase really gets them thinking about their own money values.
There are dozens of ways to start conversations with your kids about money. How you start them is less important than getting them started. From an early age, parents can be the role model as they make their own financial decisions in their life.
Using this example, we encourage parents to introduce budgeting concepts as early as possible. Parents constantly give kids advice to help them stay out of trouble, but they don’t always provide detailed money advice.
Although some parents initiate conversations about money, they don’t include in-depth education about budgeting. Most teens don’t naturally know how to manage expenses, balance a checkbook, or establish spending limits. It is important for parents to take the lead on introducing concepts about short- and long-term goals so kids can have a framework for making their own decisions.
Very few schools include these skills in their curriculum, so if kids don’t learn money lessons at home they will not have the skills they need to manage finances on their own.
The Epoch Times: What are some simple lessons young children can grasp about money?
Ms. Longo: From grade school, it’s important to teach kids about money in a tangible way. While they probably can’t understand how a plastic card can buy groceries or pay bills, they will understand the connection between the money in their piggy bank and the new toy they’ve bought. Here are some key concepts for young children to learn about money:
Have conversations about needs versus wants.
Talk, as a family, about what you are saving for, such as an upcoming vacation or a house project.
Talk about charities that you support in terms of dollars and time.
Teach your kids how to give back by having them donate toys or items that they no longer use.
Use cash for some purchases to teach your kids how to count and use money.
Show how to comparison-shop, whether it is at the store or online, while discussing pros and cons relative to the price of the product.
Discuss how getting an education can affect future earning power.
Use an allowance to introduce the three primary purposes of money: saving, sharing, and spending.
Consider a piggy bank (physical or virtual) that has three slots to separate dollars for saving, sharing, and spending. You can pick the ratio between the slots. For example, one-third of the total dollars could go to each category, or it could be a ratio that aligns with your family values.
Introduce the experience of delayed gratification by helping your child set a saving goal for a future item.
Discuss the reasons why and when someone might want to borrow money.
The Epoch Times: Many parents use chores as a way to engender a good work ethic in their children. How do you recommend parents set up a chore system in their home?
Ms. Longo: I recommend creating an allowance program that is not tied to chores. There is some debate here, but I prefer setting an allowance that is not tied to the daily chores that are expected of each family member. That doesn’t mean that kids aren’t expected to help out around the house! Allowances can be a powerful tool to teach money management skills such as budgeting and saving. Additional earning opportunities can be tied to occasional one-time jobs or projects such as cleaning out the garage or kitchen cabinets.
These days, many families can afford to buy more for their children than their parents were able to buy for them. However, teaching your kids to earn has tremendous value. If your child wants to go to an expensive summer camp, for example, set a reasonable amount that your child can earn toward the camp. Help your child think of ways to earn the money. This might include doing extra chores, babysitting, walking the neighbor’s dog, raking yards, mowing lawns, washing cars, or helping a senior with basic house cleaning. Not only does this teach kids how to earn, it also increases their confidence that they can earn and complete tasks and achieve goals.
The Epoch Times: How do you recommend parents teach their children to budget?
Ms. Longo: I recommend parents help their kids learn the concept of budgeting to continue the conversation of wants versus needs. Review the importance of daily budgets, including how and why they are created, along with tools to support staying on budget. Budgeting can be taught on a weekly basis or it can also be taught at set times. Take advantage of budget learning opportunities such as: give your kids a set amount of spending money for a vacation or a family outing and make them stick to it. This teaches responsibilities and, sometimes, consequences; and create a one-time budget for back-to-school shopping, and work with them on getting ready for school.
Finally, another important budgeting conversation parents should initiate is the importance of setting money goals. Balancing short-term and long-term goals is not intuitive to most people, because short-term spending can eliminate the opportunity to pursue a wide variety of unforeseen long-term goals.
The Epoch Times: Do you think parents should openly speak to their children about the family’s budget?
Ms. Longo: Yes! There are chances to talk about money every day. Our kids learn from what we do or don’t do more than anything we tell them.
Do they see you donate time or money to charities? Do you talk about saving for a family vacation or other big-ticket items? Do they see you research for the best price/value on an item that you are looking to purchase, or do you buy the first one you see? Do you explain how you choose between similar products at the grocery store? Is it based on quality, or price per unit?
Kids not only learn how to make financial decisions from their parents but also tend to follow in their parents’ footsteps. Once you become aware of the opportunities to create positive money conversations with your children, you will find opportunities to get kids involved in spending decisions, particularly for big-ticket items such as a new or used car, plus the complicated considerations that go into this purchase. These real-life situations will add depth and meaning to all of the other conversations you’ve created.
The Epoch Times: What should parents teach their children about debt?
Ms. Longo: Parents can teach their children about good debt and bad debt. Good debt could be considered for purposes with a mortgage to get a house or student loan debt to further one’s education. Depending on how credit cards are used, this may be considered bad debt when it is used to afford a lifestyle that one cannot really afford. Parents can explain credit cards and how they work, along with the importance of paying the monthly balance each month.
The Epoch Times: What should parents teach their children about investments?
Ms. Longo: Parents can teach the basics of investing for the future in stocks and bonds, along with the concept of risk and reward. Keep it simple and use real-life examples. Talk about your kids’ favorite products and relate this back to the companies that make the products.
Describe how a stock is an opportunity to own a small part of that company and that the value can go up and down, but over the long term, you hope the company will be more valuable.
Explain that, with a bond, you are lending money that will get repaid in the future, but in the meantime you will receive interest.
This can be an opportunity to help kids go beyond the initial conversation by helping them make small investments using on-line tools like Stockpile.com. For example, our son decided to use his birthday money to buy some stock in Apple which we promised to match as an incentive to invest for the future.
The Epoch Times: What are the key skills kids need to master to be able to responsibly manage their own money?
Ms. Longo: The most important skill kids need to master is creating and maintaining a budget. Having a concept of what money is coming in relative to expenses for wants and needs is critical to keep finances under control.
Effective budgeting can help kids avoid taking on bad debt, living a lifestyle they can’t afford, or making life choices without thinking about the consequences. These lessons can start in high school and college when kids start to think about what their career will be, putting that career into context about what the income opportunities are, and then leading into a conversation about what lifestyle that would have.
There are no right or wrong answers, but strong budgeting tools will lead to more informed and better-balanced financial decisions.