Parents know that a good education can help their children become more successful in life. But those lessons should go beyond reading, writing and math.
You can give your kids a solid financial foundation by teaching them about saving, spending, budgeting, credit card rates, compounding interest and more.
Your kids’ money education should begin before they enter kindergarten.
- Help them understand how your family gets the money it needs to live. A four or five year old may watch you take cash out of the ATM or pay for a purchase with a credit card without realizing how it relates to mom and dad going off to work each day.
- One way to make that concept more understandable is having kids earn an allowance by doing chores around the house. Some experts recommend a dollar a week for each year of a child’s age, but the amount will depend on what your family can afford and what expenses you expect your children to cover with their money.
- Teach them how to handle money by making three different containers where your kids can deposit the money they can spend now, the money they’re saving for longer term and the money that they’ll donate to a good cause of their choice.
Grade school and middle school
As your child gets older, talk to them about the financial decisions that you have to make every day. Concrete examples can help them understand the consequences of financial decisions.
- You may want to let them help decide on how the family will spend its money over the summer. Would they want to go to Disney World for a week if that means there won’t be enough money for the family to join the local pool this summer?
- Help them plan for longer-term purchases. If they’re not willing to give up the swimming pool or summer camps this year, discuss what the family might be able to do to afford both the Disney vacation and the pool next year. Maybe the family can save some if mom and dad forgo Starbucks and the kids pack their lunches instead of buying them. Make a savings chart so they can see how these weekly reductions in cash expenditures can help them reach the goal.
- As kids reach middle school age, you can begin showing them how compound interest works and how the money they save adds up over time. (Just Google teaching kids about compound interest for some great ideas on making this concept clear.)
With college and/or fulltime jobs not too far away, you’ll want to be sure your kids have the tools they need to stay on track financially as they enter adulthood.
- Some schools have students do a budgeting exercise. The teens use ads to find a job they could get and then research how much it would cost for housing, food, car payments, cable TV, utilities and other expenses. The results can come as an unwelcome reality check for kids who envision starting out with the same lifestyle as their parents have now.
- Talk to your kids about using credit wisely. If they’re already working part time and planning on applying for a credit card, make sure that they know how to compare credit card offers. Show them how much they’ll end up paying in interest if they make only the minimum payments on their credit card each month. Let them know how unwise use of credit and a poor credit rating could affect their ability to get jobs, rent an apartment or buy a home.
- Be honest. If you have good money habits, explain how keeping your debt down and paying bills on time has benefited you. If you’ve had trouble along the way, tell them how it impacted you and the family and let them know what you’ve done to improve the situation.
Talking about money with your kids may be as hard as having the discussion about the birds and the bees, but it’s equally important to their future happiness.