Understanding the importance of money and being smart at managing it is a vital lesson for anyone to learn, and it’s a life skill that parents should seek to instill in their children. Doing so will help them, in the future, to avoid some of the debt pitfalls that trip up so many young adults and to get into the habit of saving. Let’s look then at some of the core aspects of money that parents should cover with their kids.
What money is and its role within our lives:
Your starting lesson is to explain what money is. You should point out that it is used when we want to buy or sell things, with people handing over money in order to buy items that they want. Kids should quickly be able to grasp this concept, especially as they will no doubt have seen you undertaking transactions in shops many times. You can explain that before coins were developed, early man used to use items such as sea shells and stones to represent monetary value.
Providing children with their first income and encouraging saving:
Providing your children with pocket money from an early age is important, as it encourages them to start making some decisions over what they are going to use their money to buy. They will learn that there’s an opportunity cost associated with every purchase decision – i.e. if I spend a dollar on sweets that means I can’t use that dollar to buy a comic. As well as agreeing pocket money, parents should provide their child with a nice piggy bank and encourage them to keep some money back each week. You can point out that this will enable them to save up to buy something they really want (such as a doll or action toy) and you could incentivize this by saying that you will pay them a bonus if they do succeed in saving some of their money.
Setting a good example:
As any parent will know, kids learn from observing those around them and are especially keen to copy and emulate their parents’ behaviour. It’s vital, therefore, that they see you practicing solid financial behaviors. For example, you can show them that you only buy items that are on your shopping list and that you check the prices of items to find those that represent the best value. Older kids will quickly cotton on if you are profligate with your spending and this will make it much more difficult to caution them against going overdrawn or running up credit card debt once they have left home.
Opening a savings account for your children:
As well as providing your children with a little pocket money, parents should strive to put money aside into a savings account. You can explain how you’re putting money aside so that they have a fund later in life and how they may be able to use this to cover college costs or to put towards the purchase of a car or house. Whilst this is money that you may not intend them to have access to until they are 18, making them aware that you are diligently saving on their behalf should encourage them to also adopt this saving habit.
Teaching kids that money doesn’t buy happiness:
When stressing the importance of money, it would be easy for a child to get the impression that the pursuit of monetary wealth is the most important thing in life and how they will be judged in life. This isn’t a particularly healthy viewpoint so it’s important to counsel that there has to be a balance between the importance of money and the importance of other things, such as love, charity, and having a life.
Money management lessons for older kids:
The point where money smartness perhaps becomes most crucial is when a child leaves the family home, either to go to college or to start their first job. This will typically be the first time when they have enjoyed full financial freedom and some go off the rails and run up huge and damaging debts on overdrafts, loans, and credit cards. Often, where this happens, it is because no-one (neither parents nor their school) has taught them about how to manage a checking / current account or about how things like checks, credit cards, or loans work.
Learning by trial and error can be damaging to their bank balance, credit score and happiness, so it’s important that parents prepare their kids for life on the outside. Sit down and talk to them about how a checking account works and what happens if they go into an unauthorized overdraft. Explain to them, as well, how a credit card works and how a loan works and how these lending facilities need to be used with caution and as almost a last resort.
Understanding that your role as money tutor never ends:
Our children may grow up, leave the nest, get married and even have children of their own. However, they never stop being or child and they never stop looking to us for help with various aspects of their life. From a money perspective, you may find that your twenty-something son or daughter requires guidance on the process of applying for and managing a mortgage. And then, when they are thirty-something, they may ask you how they go about creating a will.
We shouldn’t look on this teaching role as a chore. Rather it’s an honor that we get to help our children and that they look to us for help and guidance with their life. If you succeed in your teaching, then you will have a son or daughter who can successfully manage their money and how knows both money’s importance and that it is not the be all and end all of life. Now that’s something to feel proud of!