1. Save for a rainy day
The cornerstone of a healthy personal finance, saving money, is something many people struggle with. From the time your children are old enough to desire toys, books, and other entertainment items, you should teach them how to save for the things they want to buy.
An allowance is a good tool to help teach this concept. Almost all personal finance boils down to this essential concept, and it’s best to learn from experience.
You can help with this notion another way, by offering to pay interest if your child saves part of her allowance with you, or by matching part of her savings if she starts a bank account – e.g. you can contribute a fifth of every amount he/she puts in the bank. Offering a high rate helps your child to immediately see the benefits of not spending him/her money. You’ll notice that your child will let go of his or her momentary desires easily, but the satisfaction that comes from saving money will last indefinitely.
2. Work hard for your money
Help your child make the connection early in life that money isn’t something freely given, but is earned through work. This isn’t to say that you should put your small children to work re-roofing your house. Instead, just emphasize that nothing comes free, even if you’re tempted to bestow upon your offspring everything that their hearts desire. If you choose to give your kids an allowance, tie it to the successful completion of certain jobs throughout the week. Or you may choose to set a market rate for various tasks.
Age-appropriate chores and rewards are the key. Younger kids can help with simple things like setting the table, where doing the job well isn’t as important as learning how to see it through. Older kids can take on more arduous jobs like mowing the lawn, in exchange for greater compensation. You may even encourage them to begin offering their services around the neighborhood.
3. Understand a budget
A budget is a foreign concept to kids (and, it should be said, to many adults). Younger children, especially, simply won’t realize that mommy and daddy have a limited amount of money to spend every month. But learning what a budget is, and why it’s a good idea, is one of the central pillars of financial literacy.
The best way to teach kids how a budget works is simply to show them. That’s not to say that you should open your books up to your children and show them every penny coming in or out (although you may consider sharing some details with teenagers about things like your mortgage payment, car payments, and so on). Instead, just give them a broad sense of how adults have to divide up their money each month.
One easy way to demonstrate this concept is to take a stack of Monopoly money, and tell your child that the stack represents how much money you make every month from work. Then, divide up the bills one at a time to show how much you spend on the house, how much you spend on food, how much you save, how much you give to charitable organizations, and so forth. The denominations aren’t important. What’s important is showing your children that you have a conscious plan for your money, and that you’re on top of the family finances.
Encourage your child to start a budget of his own: Part of his allowance should go to savings, part to charity, and part of it is just for fun. Help your child identify what he truly values, and budget his money accordingly.
4. Embrace the power of compound interest
There’s an apocryphal tale that Albert Einstein, when asked to name the most powerful force in the universe, answered “compound interest.” While the story may not be true, the concept certainly is. Compound interest simply means that the rate at which your money earns interest increases over time.
You can teach your kids about the power of compound interest with a simple exercise. Put a penny on one side of a table, to represent an account bearing compound interest, and a dime on the other side of the table, to represent an account bearing simple interest. Ask your child which will grow to a dollar in fewer steps: the penny, if you double it at each step, or the dime, if you add an additional ten cents at each step.
5. Beware of credit
Credit cards can be valuable tools in a healthy financial lifestyle, but kids need to be taught from an early age that credit cards are not free money. Here, again, you can give age-appropriate lessons in how credit works by simplifying the concepts and acting as your child’s bank.
If your child wants an item that costs $20, you’ll agree to extend credit, under the following terms.
There is a grace period of one week, after which the interest will start to accrue.
The interest rate is 20% per week.
The minimum payment is $5 (or whatever her allowance may be).
Categories: Financial Intelligence For Kids