You cannot overestimate the value of tutoring your young children about managing money. The trick is to make the lessons fun and applicable to their daily lives.
You want to be the one to instruct your kids about money, because if you don’t, they can be vulnerable to all sorts of misinformation. Start them off right and they can develop a respect for money that can serve them well throughout their lives.
Lately at Global View, we’ve seen a lot of new clients who were referred to us after searching for a Dave Ramsey Greenville SC recommended financial advisor. We help many of these clients not only with their own financial planning but also with ideas of how to instill good money habits on to their children.
Here are 4 points to consider when talking with your children about money:
Financial Literacy Should Start Early
Age-appropriate learning starts with handling money, managing an allowance, opening a bank account and understanding how money is used. Expose your pre-teen child to how you earn money, where you spend it and why you invest it.
Money Talks, and So Should You
Some folks don’t like to talk about money at the dinner table. But making your wealth a regular topic and relating it directly to your children’s lives can help them incorporate money into their thinking. Shine a light on the challenges you’ve had to overcome and the lessons you’ve learned from financial mistakes.
The alternative, not talking with your kids about money, can lead to financial problems of your own later on. Read this recent blog post about what can happen when your children are financially dependent on you later in life: When to Cut Your Children Off Financially.
Teach By Example
Your children can benefit from understanding the importance of living within your means, even when it requires delaying gratification. Share the family budget with them, explaining the trade-offs you’ve adopted. Knowing the differences between needs and wants, between the material and the non-material, between assets and debts, can help your kids prepare to manage wealth responsibly.
Discuss Their Life Goals
Even as your children set out on their own paths, you can help them understand how to leverage their wealth through thoughtful use of investments, trusts, charitable gifts and so forth to help achieve their life goals. Aggressiveness might come naturally to the young, but if you’ve done your job well, your children will understand how conservative stewardship of wealth can pay dividends for generations.
Four Simple Lessons
Here are 4 concrete lessons you can impart that can help your children start to appreciate money.
1. A Piggy Bank
When giving your child a piggy bank, make sure it’s one you can see through – when it’s clear, the symbol can provide visual cues that are important for kids. Your children can actually watch the money grow with every deposit and will hopefully come to realize that the coins have value. A clear jar can also help you praise them whenever they add a coin.
2. Their Own Wallet
One strategy is to bring the coin jar (or a wallet) to the store and use it to pay for something small. This will teach them that spending reduces the size of their savings, and that stuff costs money to buy.
If you use your credit card when you’re out to dinner with your kids, comment on how a credit card is used. Teaching kids that a plastic card is another form of money can be a lesson that sticks with them for their lifetime. Explain to your kids that budgeting is a huge factor especially when using “plastic money.”
When shopping, kids tend to want everything they see, but it’s up to you to explain that buying “A” might require sacrificing purchasing “B.” Let your child weigh the decision on their own and learn to understand how they influence the outcome. Have your kids stick to a set dollar amount.
Later in life, the concept of opportunity costs might be easier for them to assimilate. When your kids get a little older, this lesson may make them better prepared to start actively saving for college. Kids should understand how to trade off current spending to help them pay for the college of their choice.
It’s important for children to learn that money has uses beyond personal consumption.
Ask your kids to pick a charity or religious institution and explain how they can help others by donating some of their money. Over time, the hope is that your kids will learn that giving rewards the giver as much as the recipient and prepares them for the concept of charitable giving as a natural part of life. This also provides them an opportunity to learn about different organizations.
How Well Have Your Children Learned About Finances?
Unfortunately, money is seldom a topic of teaching in schools. The result is a gap between what pre-college teens know about money and what they think they know about money. Before you send your kids off to college, you might want to administer a little quiz to see how well your teaching worked. (Remember, there are things you can do in your 20s that can help you in retirement! Give your kids these lessons early so they can start planning for the future as early as possible.)
Before your kids move out on their own, give them this 5-question quiz to gauge their money IQ.
1. If your savings account interest rate is less than the inflation rate, will its buying power increase, decrease or remain the same over time?
Answer: Decrease. Inflation eats away at buying power, in this case, faster than interest boosts it.
2. If that savings account contains $100 and pays 2 percent interest, will you have more, less or exactly $102 after one year.
Answer: More than $102. Savings accounts pay compound interest, which is interest on interest that causes your total interest to increase faster than a flat rate.
3. True or false: Student loans are just a part of life.
Answer: False. Starting life out in debt can only hinder you from really getting started. There are many ways to graduate from college debt free. Talk with a financial advisor about how this is possible in your situation.
4. True or false: Investing should happen in your 40s.
Answer: False. Albert Einstein called compound interest the eighth wonder of the world. The sooner you start putting money aside, the more money your bound to make.
5. What typically happens to bond prices when interest rates rise?
Answer: Bond prices fall. Because the bond interest is fixed, it loses its competitiveness with higher-paying newer bonds, forcing down its price so that it produces an equivalent yield.
How did your kids do? If you’re unhappy with their score, their future wealth could be at risk.
If you truly want to instill financial knowledge on your children, consider consulting with your financial advisor when your kids are young to knock around some ideas about teaching them about money. And bring your kids to the meeting! Remember, your advisor is an important resource for many aspects of your life and the lives of your family members.