Having the money talk with your kids and starting them on the road to financial fitness at an early age may be more important than first thought. Some child development experts now believe that children start learning money lessons at around age 5, a time when many parents think their kids are pretty sophisticated about electronics, but not quite up to navigating the minefield of money management.
Long before your kids begin asking money questions, they’re already watching the way you handle the family finances. The money lessons they learn from watching you will help form the basis for their attitudes about handling financial matters — possibly for a lifetime. It turns out that talking to your kids about money should be a multistep process that starts with setting a good example.
This can be good news and bad news. If you like to take a creative approach to money management with regular forays into overspending on indulgences, you’ll be at risk for passing those spendthrift habits on to your children. If you’re careful about money, you’ll be leading by example and showing your kids real life lessons they can develop into their own strategies for financial success. By following your lead, they’ll learn about budgeting, delaying gratification in order to save for the future, and using coupons and other saving methods to get the best bargains for the goods they do buy.
When the day finally comes to talk about money matters with your kids, hopefully they’ll already have learned some solid lessons from the example you’ve set. If you’ve been shielding your kids from the financial realities of life in order to give them a few carefree years, now may be the time to start running the numbers with them. The more they understand, the more confident they’ll begin to feel about a topic that already interests them to one degree or another.
Here are some common-sense strategies for broaching the topic of dollars and cents with your children. These days there are tools that offer a kid’s eye view of the world of saving. Encouraging your child to use one can make the money talk almost fun.
The topic of money can get complex, but luckily there are tools and a few clever strategies that can make the process of teaching your children dollar sense easier:
At around age 5, a child is already interested in playing with coins. As a parent, you can use that interest as a bridge to start discussing some of the basic elements of money by comparing coins and showing your child what coins can buy in places like the market. Piggy banks are a great second step in this process. Giving your child coins to place in a piggy bank will help introduce the concept of saving. Coins that accumulate in a piggy bank are a dramatic visual reinforcement of the time value of consistent saving long before your child is introduced to real life bank accounts and investing.
Coins are a good place to start, but when your child gets a little older — say 7 and up — you can branch out into the areas of spending and wise saving. To avoid making this all sound like the “clean your bedroom and pick up your toys” talk, using aids can help. There are a number of software packages on the market that teach kids about saving and managing money. There are also several useful Web sites that help kids learn money lessons by tracking their spending or helping them save for a specific goal.
Use real life lessons
Taking your child with you when you shop and bank can teach him or her about checking accounts, signing up for rewards and rebates, and using coupons to save money on things he or she would likely buy anyway. This is a low stress approach that will inspire questions and encourage a useful dialogue between you. Oh, and you’re always welcome to bring your child to the bank to introduce them to banking. We even have a savings account designed just for the young saver.
Give your child an allowance
Giving children money for incidentals is a traditional way to help teach them the value of a dollar. To help your child develop a realistic and responsible relationship with money, expect him or her to perform certain basic chores, like cleaning their room or clearing the dinner dishes, for no compensation. Those tasks are part of family life expected of everyone. Offer compensation for certain additional chores, like raking leaves or washing the car. Instead of offering the money in advance, though, only provide payment after reviewing the completed tasks with your child. This is a great time to talk about money and reinforce the lesson that money compensation is related to consistent, reliable performance.
You can take it one step further by helping them create a budget for their cash.
Use real-world examples of monthly expenses — like a soccer uniform, a birthday present for a friend, new school clothes or favorite snacks — so your kids can see what a dollar is worth. By including real-life examples, you’ll share with your children what it takes to maintain their lifestyle.
Help set long-term savings goals
Most kids want something new — shoes, video games or gadgets. Why not have them save enough to make the purchase themselves?
Once you show your children the cost of what they want, introduce the idea of creating and putting into place a long-term savings plan. To track allowance and save toward goals try the app Bankaroo, thought up by an 11-year-old girl and developed by her family.
By helping your kids create a savings plan using concrete examples that actually matter to them, you pave the way for them to think about more complex goals, such as saving for college.
Children might not even realize that your family has financial obligations to consider, such as the mortgage for your home. To explain the concept of a loan, provide your children with an example they can relate to, like borrowing money for lunch.
Ask your children to imagine that they loan a friend a few dollars to buy lunch, and the friend pays it back after a little while. The friend throws in a bag of chips as an extra “thanks” for the loan. A mortgage is like that — the bank loans you money to buy the house and requires that extra “thanks” in the form of interest. (Interest is a tricky concept, but snacks help.)
And if that friend doesn’t pay back the loan, your child isn’t going to want to lend him lunch money in the future. Similarly, banks hesitate to lend money to people who haven’t paid off loans in the past.
When your child is old enough to have a part-time job help him or her set up and maintain a free Value Checking account. We hope you have already opened an interest-bearing Kids Savings account before then. Consider the checking account their introduction to the real world of money management.
Source: How Stuff Works; NerdWallet; Child Mind Institute