As a parent, it is your job to teach your kids that money doesn’t grow on trees. They have to understand that ATMs are not little money printing presses.
But how can you do that? Well, that’s what we’ll focus on today.
When kids are five or six, they start developing cognitive skills that allow them to understand the basic concept of money. They can identify coins, they can count, and they can match simple items to their monetary value.
This means that they are ready to start taking money lessons from you.
Besides teaching them the basics of economics, money lessons can also arm your kids with essential life skills. For example, when they understand that money needs to be spent wisely, they start understanding the concept of delayed gratification. This, in turn, teaches them patience and planning skills, something that will prove very useful to them later in life.
The strategy: Personal Finance 101
We all want to increase our kids’ money smarts. Here are a few strategies to help you do that:
Teach them how money works. Where does it come from? How do people get it? How do banks work? Get them their own piggy bank, then explain how banks are like large piggy banks where people keep their money until they are ready to use it. It is important that your child understands that when money is spent, it is gone until you earn some more. Make them understand that this is why you have to be smart about what you buy and why you can’t always buy whatever you want.
Build their money skills. By this time, they will have probably learned a thing or two about money on their own or at school. It is your job to build upon these lessons. For example, you can make a chart that has basic money equivalents. How many pennies, nickels, dimes, or quarters make one dollar? You can also play shop with them to reinforce these lessons even further.
Give them a small allowance. This is important because it helps them to see the value of money in action. Don’t give them a large amount – as long as they can afford ice cream bars or hair clips or a few cheap toys, they have enough. They will soon realize that if they want something better or more expensive, they have to hold off on buying something now and wait till their next allowance to have more money to spend. The idea of saving starts coming into play.
Let them spend their allowance. Whenever you go out, tell your child he can bring his money if he wants to buy something. Help them count out the correct amount they need and wait for their change with them. If he doesn’t have any money left and still begs for a toy, don’t give in. That defeats the purpose and reinforces a negative entitled attitude towards money, which is exactly the opposite of what you want. If your child wants something expensive, help them figure out how much they need to save each week in order to afford it.
Help them make money. Children’s main source of cash is their parents. Teach them that they can increase the amount of money they have, but it’s going to take some work. Come up with things your child can do beyond her regular chores and match each task with the amount you are willing to pay for it. Soon, when they want to buy something, they will start offering to get something done in exchange for money.
An age-by-age guide to teaching your kids about the value of money
The good news is that you do not have to wait until your child is 5 or 6 to start giving her money lessons. You can actually start much earlier. Here is an age by age guide on how to do it, from toddlerhood to teenage years.
Young children (4 to 8 years)
Be mindful as you discuss money out loud in their presence. Young children pick up a lot of verbal and nonverbal cues about how their parents handle their finances. If you spend most of your time bickering with your partner about money and bills and expenses, your kids will pick up on that, and it will start shaping their attitudes towards money. So whenever you are discussing money around your children, try to pass down positive attitudes you’d like for them to have.
Teach them how to save. For kids, money is a visual thing. Show them how it grows by getting them a transparent piggy bank or jar where they can put their money for spending later.
Teach them how buying and selling works. At this age, your kids need to know that money can be exchanged for goods and services. Show them how the money from the family jar can be used to buy groceries and other things in the home. You can also do this by letting them spend their allowances, so they get to see the value of money first hand.
Preteens (9 to 12 years)
Give them allowances. A lot of parents start offering allowances when their children enter middle school. Consider tying it to certain tasks or chores, and make it a flexible amount that increases depending on how much your child does.
Make them understand the concept of needs and wants. When kids hit the preteen years, they start noticing that other kids have more, or less, than they do. You should take this opportunity to explain the difference between needs and wants. So when your kids want something at the store, talk to them and let them make their case whether it is really important to them or if it is just an impulsive purchase. This is an important distinction that will continue proving useful for the rest of their lives.
Help them come up with larger savings plans. By now, your child has a good understanding of how money works and the benefits of saving. You can take things a step further by offering to match their savings up to a certain amount. You’ll have started introducing more complex financial concepts like 401k and pension schemes.
Teens (13 to 19 years)
Encourage summer jobs. At this age, your child needs to start figuring out how to supplement their income. Consider helping them look for opportunities online or by being entrepreneurial on their own. This will give you the chance to talk to them about budgeting and the responsibility of saving a portion of your income.
Talk to them about saving for college. No one wants to depend on big, expensive college loans anymore. Talk to your kids about saving a portion of the money they make towards their college education. You also have to make them understand how interest rates work, and how borrowing now means you will have to pay more later.
Talk to them about money often. Conversations about money are important to have with your kids, especially as they grow up. So no matter how difficult the may be, they need to be had. Show them how they can have a good relationship with money, because this relationship will be a major success factor in their future. Encourage questions and let them know they can always talk to you about finances.
As long as your kids can understand it, you need to teach them that a good understanding and a good relationship with their personal finances is the key to their financial freedom later in life.
So show them how to have a positive attitude towards money when they are young, and talk to them about it as they grow older. And understand that these lessons should never stop, because money lessons never end!