How children learn to save and spend money can play an enormous part in their future success. With patience and persistence, even the busiest parents can ensure their kids will become financially savvy adults. Here are five guidelines to get started.
Educate on the Fly
If you wait for the perfect time to have a sit-down talk about money, the day may never come. Instead, take advantage of real-life opportunities to teach.
As early as age four or five, children will watch curiously as their parents make financial transactions. When your kids notice as you pay and take change from a cashier, take a minute to explain the purchase process. When they see an ATM dispensing cash, let them know that the money comes from your bank account, and you can only withdraw the money you’ve earned.
When they insist on having every toy they see on television, discuss the difference between “wants” and “needs.” Their begging may test your resolve, but standing firm will reinforce the message that controlled spending is important.
Encourage Goal-Setting
Just like adults, children need a reason to save money instead of spending it. Savings goals for young children should be short-term and small enough to allow them to see results quickly. Saving change for a few weeks to buy a new action figure is a process they’ll grasp. Putting pennies toward a far-off college education is not.
As children get older, their goals should grow with them. In their teenage years, a part-time job can provide the means toward loftier goals while also teaching the value of hard work, and the inevitability of taxes.
Develop a System
As early as the pre-teen years, introducing systems that mimic adult life can help prepare children for the real world.
A weekly allowance is a common tool to teach kids to live within their means. But lessons can be lost if the pay is too generous or limits aren’t enforced. At any age, an allowance should be small enough to require kids to make choices about spending.
There should be some expectation that a portion of the allowance should go toward savings. Help your kids decide on how the allowance is allocated. Consider rewarding them by matching all or part of their savings with your own contribution. Whether they’re saving for a model car or the real thing, the promise of a bigger payout provides an incentive to adopt the saving habit early. Some parents even impose an automatic savings deduction from each week’s allowance. While the kids’ might object, they’re excited when they see their piggy bank filling up.
Move Beyond Savings
While a basic savings account is good for teaching Banking 101, adolescents should eventually be exposed to the world of investments. For most people, investing early and often is their best bet to achieve financial security later in life.
The most important investing concept children should learn is the power of compounding. If they put their money in an investment with a positive return, and reinvest those earnings as they receive them, the money will build on itself and grow over the long term. Put in kids’ terms, it means that after a long time, they can take out a lot more money than they put in. Kids also should be aware that putting money in an investment vehicle does come with risk and that a positive return is not guaranteed.
To help young people learn the ropes early, some financial services companies now offer real investment accounts specifically designed to educate kids. Some kid-friendly mutual funds invest in major companies children know, and they allow low starting balances and monthly contributions as low as $20. Most of these programs aren’t heavily advertised, so you may need to ask your investment firm about availability.
Maintain a Unified Front
Some say it takes a village to raise a child. It’s especially true for raising a financially savvy child. No matter how focused the parents may be on teaching smart money management, their hard work can be innocently sabotaged by too many large gifts from grandparents, family members and friends.
