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The Council for Economic Education has an interesting finding: only one-third of U.S. states require high school students to attend a personal finance class as a condition for graduation. This could be the reason why one in five 15-year-old Americans is short on the basic financial literacy in 2017 as the Program for International Student Assessment discovered through a global exam that measures areas such as math, science, and reading.
Because there is a vacuum of state-mandated personal finance programs for these students, the burden of teaching financial literacy to children now falls primarily to parents. And there’s no shortcut to it so mom and dad should prepare themselves for the long haul.
You can never start too early to teach kids about money and money stuff. In fact, grade-school age is just perfect for teaching kids about money because what better way for them to apply addition, subtraction and other match concepts other than on money matters? Parents can use these times as teaching moments to imprint valuable fiscal skills on their young minds like saving money. As they grow older, they can start to make choices and decisions about money so you can let them make the call on certain things. They can choose how to spend their allowance (or save them) or how to do a simple allocation (budget) while on a family vacation.
What should you teach your kids about money? Here are the most important ones:
Teach Your Children About Saving
You can start your children by picking out together a cute piggy bank or a favorite Disney character wallet – whatever it is, identify a place where they can keep their money. Some experts suggest three containers for your child: one for saving, one for spending, and one for charity. Then, you can discuss and decide together how to divide the weekly allowance among the three receptacles.
When the child gets into the habit of saving, you can open a saving account.
Simply explain how the money grows in a saving account and how the compound interest computation works. When they are ready, you can move up to a checking account.
Let Your Children Use a Budget
Involve your children in planning and budgeting for a family event so they can apply budgeting techniques and skills. You can use this to point out the opportunity cost of spending money on one thing and its consequence of not having enough money for other things.
Since children are familiar with modern technology, you can use it to teach them some aspects of personal finance. Teach them how to use a spreadsheet so that they can see the numbers change when they key in items or increase/decrease amounts. We’re sure that kids of all ages will enjoy using the apps to gain new knowledge and practical experience.
Let Them Get Financial Decision Making
Allow your children to decide on how to spend their money but be prepared that they will make mistakes and waste it a little. Experience is a good teacher. Just be ready to jump in and provide guidance when they need it.
Children also need to understand that money doesn’t grow on trees – even if it seems so in the family. This means that when they buy certain things, they might not have enough left to buy other things.
A good object lesson for this would be the everyday choices. Take them grocery shopping for a learning experience. You can let them choose to buy one item from two or three of their favorite food but explain that the money available is only good for one kind and no more.
Make Mistakes Baby
As we’ve said, they’re bound to make mistakes when you let them make their own spending decisions. The important thing is that you let them process the mistake and learn from it. It’s better for them to slip up now and waste a small amount. You would rather have them waste $50 now than $5,000 when they’re all grown up.
Don’t be quick to be a hero and save your child when he is on his way to making a bad decision with his money.
And don’t replace the ill-spent money to appease the child either because the child won’t learn at all. Let the kids do everything by themselves, learn from their mistakes and hopefully have fun in the process. It would be good to share your own personal stories of your financial blunders when you were young so they will learn that it is normal not to get everything right the first time.
Patient For Success
One of the best things you can teach your children is the concept of ‘delayed gratification’ because it will save them from a lot of problems in the future. You can help them avoid the “buy now, pay later” trap and spare them from an overwhelming credit card debt in their adult years. Take every opportunity to point out that waiting pays off.
For example, when a child wants to buy something, use that time to talk about eyeing a larger purchase and saving up for it. You may even offer to share part of the cost with them if they are willing to save or just challenge them to buy the item entirely out of their own money.
Raising financially responsible children means opening their eyes to the reality that there is really no such thing as a goose that lays the golden egg or easy money.
While they are young, they should learn that if they want to buy something, they have to wait, save (or even work for it) and buy when they have the money. Whatever financial discipline they will learn now will set them up for future success financially.
Make them understand that you don’t have to buy so much stuff to be happy.
You can offer to match their saving just to give them an incentive. Let them appreciate the value of accruing interest on saved money over time by tracking their saving through a chart. That way, they can see their progress and they can see that the money they put aside makes more money for them.
Let Them Earn Money
There are house chores that children should do because they are part of the family. Some of them are: making their bed, stowing their dirty clothes in the laundry hamper, and helping set or clean up the dining table. You can use some of the other chores as a teaching opportunity by paying them if they volunteer to do them.
Some parents do not like this idea at all but if you think about it, they will look for a job later and this will be the basis of making money – you work before you earn. Why not expose them to this concept now? When they’re older, they can babysit, clean houses, mow lawns, be a lifeguard, caddy for a golfer, sell clothes in a boutique or crew for a fast food joint. Some people work in factories or shops to earn college money.
If your children don’t want to be stuck stacking crates in a warehouse somewhere for minimum wage (although there’s nothing wrong with that), that’s enough motivation for them to take college seriously. When they learn this, they will try to do well in school so they can get higher-paying jobs.
Be an Example of Responsible Financial Behavior
It is important to remember that modeling is powerful – children will copy what they see from their parents or elders. They are keen observers because they pick up the subtle things and turn them into their self-belief systems so be careful what you let them see and learn from your ways. Showcase the positive financial habits and principles consistently day-by-day, moment-by-moment.
This could include things like sticking to a budget, using coupons and discount offers to save, and making do with pre-owned items to lessen expenses. Do your homework and highlight the opportunity costs while discussing money management with them.
Invest On Their Behalf
You can teach them about passive investing where you pour your money into a few things and then letting it stay there (without buying or selling frequently). This is a great way to start them into investing and later, you can move on to a more active style as they learn more.
Preschool is a good age to start teaching your children about money matters. At this young age, they can already understand the basic ideas of investing. Once they are familiar with simple banking transactions, expose them to the stock market so they could learn what it is about. Explain to them the savings vehicles that could earn interest such as savings bonds and CDs.
Explore appropriate stocks and mutual funds that can provide them with dividends and capital gains. Let them select a couple of investments with low amounts. When they choose their own stocks, they can learn to keep track of them so that they get valuable lessons when they see how they fluctuate in value. They would begin to ask questions, read financial news and make the correlation on influences that affect the stock values.
As your children grow older and gain more knowledge and experience in saving and investing, you can gradually step back and let them take the rein.
You can just give them some advice and feedback from time to time. They would also transition from being reliant on you as young children to desiring to be more independent as teenagers.
Money could be a good instrument of learning for both parent and child as they go through the journey together. Purposefully teaching your children about money is not just a good investment on your part but is also one of the best legacies that you can ever give them.