As a parent, you probably assume that teaching your children fundamental life skills like how to handle money is the school’s responsibility. With both adults in a couple typically working, there often just isn’t time to make sure the kids learn all they need to about changing a car tire, how to act in different situations and filling in a tax return.
Luckily, at least they’ll know that mitochondria are the powerhouse of the cell and something important happened in 1492.
Neither of those facts are all that useful in adult life outside of trivia contests, but it seems unlikely that the school curriculum is going to be updated and brought into the 21st century any time soon. Some states do require students to take financial literacy classes, but it remains a struggle to make these engaging and relevant to the real world. In other words, if you want them to succeed, you’ll have to teach your kids about money yourself, as well as relationships, critical thinking and a dozen other crucial but non-academic subjects.
But what exactly are the lessons every kid needs to learn about personal finance? How can you make this information stick instead of turning everything into a teflon-coated lecture? This article shares a couple of ideas you can use right up until they’re ready to leave the house and strike out on their own.
Table of Contents
- 1 Be Open About Family Finances
- 2 Allow Them to Manage Their Own Money
- 3 Encourage Them to Save for Their Goals
- 4 Make Learning About Money a Game
- 5 Get Them to Practice Delayed Gratification
- 6 Show Them that Happiness Isn’t About Owning Stuff
- 7 Talk to Your Kids About Business
- 8 Make the Conversation About College Count
- 9 The Importance of Teaching Kids Good Money Habits
Be Open About Family Finances
Most parents are hesitant to talk with their children about bills, debts, layoffs and similar features of everyone’s financial life. Of course, you don’t want to teach them the wrong principles or have them grow up feeling insecure about things like losing your house. Nevertheless, keeping your financial cards close to you and your partner’s chests can end up implanting exactly the wrong message: when it comes to money, it’s okay to stick your head in the sand.
Many people who are adults today have unfortunately taken this to heart: they don’t plan their spending because drawing up a budget makes them uncomfortable, they don’t truly understand debt because the repayments can be ignored (for now), and they don’t bother to educate themselves about things that, when misunderstood, can cost them dearly.
In other words, there’s no reason to make up a story about the North Pole if Santa can’t go all out this year; just let the young ones know that having a modest Christmas this year is the responsible thing to do (and doesn’t have to be any less fun). When telling them the air conditioner and space heater shouldn’t be on at the same time, get out an electricity bill and explain how saving money in one area makes more available for use elsewhere. Finally, and possibly most crucially, take care to put money in its proper context: an important and useful tool, but far from the most meaningful part of life.
Allow Them to Manage Their Own Money
Sad but true: it’s very difficult to learn from other people’s mistakes unless those mistakes are both stupid and spectacular. Gaining experience is usually not a team sport.
This means that you sometimes have to give your children the freedom to do the wrong thing. With a toddler, for instance, you could give them the choice between a trip to the zoo or a toy costing the same amount. Alternatively, let them decide whether you buy the cheaper version of their favorite brand of cereal and put the price difference in their piggy bank. As they get older, you can start giving them first a weekly and later a monthly allowance and let them manage it as they will – but no more “gimme” handouts for non-essential items that they’re supposed to purchase for themselves.
Parents are divided on whether or not an allowance should be contingent on children doing chores. On the one hand, this introduces them to the basic idea of working for a living: payment in exchange for effort, e.g. “half an hour of vacuuming buys two candy bars”. Other parents believe that helping around the house is a child’s responsibility and compensating them for doing what they should anyway encourages bad behaviors. Whichever system you choose, an important part of this lesson is to allow them to do whatever they want with their own money (short of buying cigarettes), but not to bail them out if they overspend either.
Encourage Them to Save for Their Goals
Eventually, once they’ve grasped the idea of opportunity cost – that spending money on one thing means doing without another – it may be time to teach them the value of saving for what they desire instead of immediately turning to credit. This is a lesson that has to be learned early in life but becomes increasingly important as you get older: a $300,000 house bought with a 30-year, 3.5% mortgage ends up costing you $466,500 with a 10% down payment, but only $429,500 with 30 percent down.
The first step is usually to open a bank account for them – if they’re under 18, this will be a joint account, allowing you to keep an eye on their spending and saving patterns. Monthly statements will also let them see their savings grow and introduce them to concepts like interest and how easy it is to waste money when you’re swiping plastic rather than counting out cash.
You may also want to suggest that they find a job of some sort and see how earning their own income, along with some patience, can make their bank balance grow – actually let them run the numbers on how saving an extra $5 a week will benefit them in a year or two’s time. If nothing else, they’ll thank you later for explaining how to search through job openings, write a professional resume and conduct themselves in an interview.
If you like, you can share the story of Warren Buffet, one guy who understood the value of saving. Despite being from a solidly middle-class family, he was selling chewing gum door to door before he was 10 years old, filed his first income tax return aged thirteen and bought a forty-acre farm the next year. By the time he finished college, he was worth over $100,000 in today’s money.
Make Learning About Money a Game
Monopoly is certainly about money, but it’s not really reflective of how the world works (in addition to being as boring as watching paint dry). Fortunately, there are a number of educational games, both digital and tabletop, that manage to strike the right balance between learning and fun.
- Bite Club challenges you to juggle loan payments and expenses while also saving for retirement. As this game is aimed at teens, it’s not all that surprising that you play a vampire running a nightclub. Luckily, there’s a minimum of gore or Twilight-style sappiness. On the other hand, the nature of the main character means that he intends to live for quite a long time after quitting the rat race, making a comfortable retirement that much more difficult to achieve.
- Shady Sam may be aimed at middle school kids, but touches on a very serious problem: predatory lending. As the titular character and professional loan shark, you try to take advantage of gullible borrowers, learning about interest rates, collections and other topics related to credit along the way.
- Act Your Wage is a board game for up to 4 players of ten years or older. At the start, everyone is in debt and is randomly assigned an identity that determines their income. This game brings home a two-fold lesson: you always need to have an emergency reserve to fall back on, and getting out of debt is a lot better than trying to lead a lifestyle you can’t afford.
- Depending on how much of a challenge your teenager is up for, you can also try any of a variety of stock and bond trading simulators. Bear in mind that even professional brokers get it wrong about half the time; if anything, these games teach you to leave your inner cowboy at home when investing.
Get Them to Practice Delayed Gratification
A famous psychological experiment goes like this: place a marshmallow in front of a small child and tell them they can have another if they leave the first alone for ten minutes. The idea was to test which children had the self-control to sacrifice instant pleasure for a greater reward later, and in fact it did turn out that kids who waited for the second marshmallow performed better in several ways later on in life.
On a side note, many people now argue that the test is really about different children’s level of trust in authority figures. If, before being offered the marshmallow, the kids are given a few crayons with the promise of more shortly but then disappointed, they’re much more likely to eat the marshmallow immediately – a simple case of a bird in the hand being better than two in the bush.
Still, the ability to delay gratification is a powerful skill in life and especially when it comes to finance. The best way to teach it to your children is by example: don’t get impatient when waiting in a long line; make a point of mentioning how much money you save each month and why. Make “work before play” a rule in your house for them as well as yourselves, and limit their screen time – both television and video games are all about instant rewards. In addition, when it comes to money, make them wait at least a day for any optional purchase over (say) 10 dollars and a week before spending more than $50. They might realize that they can, in fact, live without that trendy toy or pair of sneakers.
Show Them that Happiness Isn’t About Owning Stuff
Most really wealthy people got that way by inheriting a fortune or at least the start of one, which is a difficult trick to pull off. For the rest of us, as it turns out, financial success depends a lot more on how you spend rather than how much you earn. Even people who make a six-figure salary are sometimes living hand to mouth.
This may be one of the more difficult lessons to help take root, as you’re competing against a multi-billion-dollar advertising industry. Still, your own example can go a long way.
Your attractiveness doesn’t depend on what label your clothes carry. Ferraris and Toyotas both have to obey the same speed limit. A larger house isn’t necessarily more comfortable to live in. There’s nothing wrong with being rich, but living within your means doesn’t make you a bad person either.
One of the biggest causes of irresponsible spending is simply that people believe they’re not good enough unless they surround themselves with material objects. Getting your children to see through this lie is one of the greatest financial gifts you can give them.
Talk to Your Kids About Business
Going into business for themselves may be the best or worst decision your children will ever make, and there’s no way of telling in advance which it will be. You certainly want to give them the option; only the very bright or very lucky will ever strike it rich by being an employee. That’s not the real point in educating them about the business world, however:
While they’ll only be able to grasp most of these concepts once they’re older, learning about entrepreneurship actually serves as a stepping stone to a whole range of topics: budgeting, negotiation, responsible borrowing and lending, accounting, evaluating risk and many more. Not every parent is able to cover all of these themselves, but giving your kid the gifts of self-confidence, creativity and motivation (perhaps along with a book or two to explain the more technical aspects) may well go a long way. If they should start talking about setting up a lemonade stand, carwash or lawnmowing business, of course, your emotional and practical support will go a long way, regardless of whether they fail or succeed.
Make the Conversation About College Count
Student loan debt is now up to $1.56 trillion, a number so large that it’s difficult to wrap your head around it. At the same time, a college degree is no longer any guarantee of finding a job, never mind one that allows you to pay back what you owe within a couple of years.
Applying for college and all that entails is probably the first truly grown-up thing your child will do. It’s important to stand by them while also tempering their enthusiasm with reason. You could, for instance, research average salaries in their chosen profession and use a loan repayment calculator to compare this to the payments they’ll have to make. This by itself may make a local college seem a lot more attractive than that one with the famous football team. Be upfront about how much you can contribute to the cost – no doubt, you want only the best for them, but your own resources have limits.
It’s also worth remembering that college is only one option for the newly minted adult. The alternatives are sometimes less prestigious but no less lucrative, and your child deserves to know about all their options.
The Importance of Teaching Kids Good Money Habits
One study done at the University of Cambridge determined that a child’s attitude towards spending is already largely formed at only seven years of age. Much of this outlook is absorbed directly from their parents, making it essential to guide them by example.
Learning to make good financial decisions at a young age, like saving for a goal and resisting impulse purchases, set the stage for good money choices later on in life, such as avoiding credit card debt and working from a budget. This is one instance where “knowledge is power” really is nothing but the truth. If you lay a firm groundwork while they’re still young enough to listen to you, they’ll find it much easier to understand the real implications of buying vs leasing a car, starting a business and saving for retirement. Who knows, they might even continue to think back on and ask for your advice once they’re all grown up and living far away.