Even if you’re a first-time parent, you can give your kids the tools they need to succeed by making financial literacy part of your family’s daily routine.
This article will discuss ideas that can help you achieve this goal and share some tips you can use to ensure your kids get the best financial education possible in preparation for financial success in their adult lives.
Teach your child to differentiate between wants and needs
When discussing money, it’s essential to teach your child that money is not something you get when you want something. It’s just a tool to get things you need. Once you help your child understand that, it’ll be easier to teach lessons about the value of money and its impact on other parts of human lives.
In addition, it’s vital that you also teach your child how to identify their priorities, especially because we live in an age of instant gratification.
For example, if your child has a burning desire for a new iPhone, help the child understand that this want can wait because other pressing needs take precedence.
Setting up an allowance system is perhaps the best way to teach kids about wants and needs. When your child has an allowance, teaching lessons about what to save and spend is easier.
Set up a system where your child earns money from completing house chores or doing tasks like mowing the lawn or washing dishes once per week. Ensure your child understands how much responsibility goes along with each chore before giving cash rewards, and then help your child create a saving and spending plan.
Introduce the concept of savings and interest
Be an advocate for savings in your home.
Kids are natural spendthrifts; thus, you must encourage them to save their money instead of spending it all at once or on impulse purchases. You can do this by setting up a piggy bank or putting away their allowance weekly or monthly, so they have something set aside each time.
You can introduce the concept of savings and interest to your child by explaining that money is an investment that earns interest over time. For example, you can tell your son or daughter that when they save a portion of their income for X time, you will add a certain percentage to the initial amount.
Also, explain what inflation is and how it affects the value of money over time. Kids need to understand that their money has attached risks.
For example, you could ask your child, “if you have $10 in savings but decide not to invest it because you’re afraid of losing it all at once (because this could happen), what happens when inflation rises?”
The answer is that the savings will lose more value than they would otherwise. Helping your child understand this will instill foundational investing principles that can set your son or daughter for financial success in the future.
Teach about budgeting
There are many ways to budget, but most budgeting paradigms have one thing in common: they ask for a monthly budgetary review or plan. Helping your child create a monthly budget and review it will instill financial discipline and help them avoid overspending.
Here are some tips you can use to help your son or daughter create and stick to a monthly budget:
- Together, create a budget that caters to the family—and the child’s— needs, wants, and investments and sets aside monthly cash for emergencies or unexpected expenses.
- As you review your budget monthly, involve your child in the process and motivate them to think about what categories they’d like to have in their budget. Help your child divide their earnings into different categories, using your family budget as an example; for example, your family budget might have categories like food and utilities, school supplies, clothing costs, and debt repayment. You can even go as far as giving your child low-interest loans and then motivating them to have a debt repayment category in their monthly budget.
Discuss responsible debt management and credit card debt consolidation
The great thing about financial literacy is that we can learn it at any age, but it is best to teach it to kids and young adults who are likely to make costly mistakes with their spending habits and financial decisions as they grow older.
Teaching kids about responsible debt management and credit card consolidation is downright a parental responsibility every parent should take to heart because the possibility of getting a credit card once they come of age is exciting. Out of this excitement, without sound financial knowledge, it is easy for kids to get into debt that spirals out of control.
Teaching your child about responsible debt management and credit card debt consolidation can give the child the know-how to take advantage of lower credit card payments, which is especially important because carrying too many credit cards instead of a consolidated debt can have negative credit score ramifications.
Discuss investing for long-term goals like retirement or college
One great way to teach kids about investing is by doing it yourself and involving your kids in your process.
Start by explaining what investing is and why it’s essential for them to start saving early. You can also show them how much money they need to have set aside by the time they leave high school or college, depending on their goals and needs.
Once you’ve taught them how investing works and the various investment products available, encourage them to start small with stocks and bonds — these investments could eventually grow into huge sums of money over time.
Moreover, teach your child about the risk involved in investing. That involves discussing all the risks involved with stocks and bonds so they’ll know what each option entails before trying them out.
Help your child identify their financial strengths and weaknesses
Understanding your child’s strengths and weaknesses will help you determine which areas of financial literacy need more attention and which ones can wait for now. Talk about what you notice, then note any areas where your child excels or struggles.
Teach your child how to save and eventually invest money responsibly. Take an example where your daughter is good at math.
In that case, you can teach her why she needs to save up her allowance or birthday money every week until it’s time for a big purchase (such as a bike). Help her understand that saving up is an important way to build up assets over time so she can have money in case of an emergency or unexpected expense.
Financial literacy is a process you and your child will go through over time. Don’t expect to get it right on the first try, and don’t get discouraged if things aren’t going as planned.
It takes time and patience to instill sound financial principles in kids, but you can start your child off on the right footing early on in life and teach them principles that help them stay out of debt and build wealth in their adult life.