Money management is an important skill for children to learn, but it’s a lesson that many parents fail to provide. To be fair, talking about money is often difficult. The topic can be personal, technical and moral. Some parents are not confident enough in their own knowledge to pass it on, and others are so confident they forget that the basics even need to be discussed. Regardless of these hesitations, you should set your children up for success in life by educating them on how to be responsible managers of money. Here are six essential money lessons and how you can teach them to your kids.
Lesson 1: earning money
Before learning how to use money, your child first needs to have some. If all you do is hand out money freely to your kids, however, they’re likely to view you as an ATM and see money as a limitless resource you can conjure up at will. Teaching them how to make money will help them learn its value and develop independence, resourcefulness and self-sufficiency.
Once your children are ready for an allowance, talk to them about the responsibilities you’d like them to fulfill in return for the payments. Make sure that they perform their duties satisfactorily and on time, and pay them consistently when they do so. This will teach them about the flow of money and how to budget for it.
Show your kids how to earn more money through initiative, creativity and/or hard work. Have them try their hand at helping with a garage sale, running a lemonade stand, offering car washes, providing lawn care help or selling homemade crafts.
Lesson 2: saving for a goal
It’s important to show children that money is a resource to be conserved and managed, not a mysterious blessing that comes and goes at random. Without this understanding, it’s easy for them to simply spend all their money immediately at the first opportunity and impulse. The way to teach responsibility here is by showing them how to save for a goal.
The “envelope system” is one such way to teach saving. To begin, designate two separate envelopes, jars, or other containers for saving and spending. Suggest a goal the savings jar can be used toward, and allow them to use the spending jar as they see fit. Once the child is familiar with the concept of saving, more containers can be added to allow for different goals. This helps teach that money has value, that delaying gratification can bring greater rewards later and that money is all gone once it’s spent.
Practicing saving is also an important opportunity to improve basic math. Using addition or subtraction to plan savings and purchases makes math more tangible and shows its usefulness to kids in a way that school lessons may not. By establishing this understanding when they’re young, you can better prepare children for new concepts like interest and loan payments when they’re older.
When your children have advanced beyond envelopes and jars, you can co-sign on a savings account for them once they’re ready to manage a real bank account.
Lesson 3: spending smart
Along with smart saving comes smart spending. Show your children how they can get the most from their dollars and how they can invest money in things that improve their lives.
Everyday activities offer many opportunities to teach savvy spending. Grocery stores, for example, are full of lessons on cost versus quality, bulk discounts, sales and coupons. Include your children in your decision making on purchases, explain your thought process and ask for their input.
Lesson 4: needs versus wants
Understanding the differences between needs and wants is an important lesson that applies to many parts of life. The sooner your children can grasp this concept, the better. This will help them make smarter money decisions by delaying gratification and resisting the urge to purchase on emotion and impulse.
The next time your children ask you to buy them something when you’re shopping, ask them whether they really need it or just want it. If you don’t get the item for them, wait to see if they remember it a week or so later, then use the example to show whether the item was an impulsive want or a real need.
Lesson 5: sharing money
Another important lesson that goes beyond money is sharing. Generosity not only makes the world a better place, but some studies claim it leads to greater personal happiness as well. Because of this, the value of generosity is an important lesson to teach.
One way to deliver this lesson is with a savings jar for giving. A person or issue your children have a strong connection to are good gift recipients. A donation to a local animal shelter from a dog lover or a holiday gift for a best friend are two such examples. Whatever, the case, be sure to point out the positive effects of the child’s giving.
This is also a good opportunity to demonstrate how to accomplish things without money. Ask your children if they would rather volunteer or give a homemade gift instead of making a donation or buying a gift. This helps show both the trade-off between time and money as well as the fact that money isn’t necessary to achieve all goals.
Lesson #6 borrowing money
Even without bringing interest into the equation, teaching your children about borrowing money can be a complex topic. While it’s tempting to avoid the issue by saying that all debt is bad, it’s important for children to understand how responsible borrowing can be an important tool.
Offering your children a loan is a good way to introduce them to borrowing. If they want to purchase a big-ticket item such as a computer or bike, you can offer to loan them half the amount if they come up with the other half. While charging your children interest is not a necessity, it is a strong lesson about how loans operate in real life. It may be far preferable that they experience and understand the concept and cost of interest now rather than stumble blindly into expensive debt later in life.
If you’re comfortable with the topic, talk with your children about how you borrow money in your life and how it affects you. Mortgages, car loans and credit cards are all worthy examples. Exact dollar figures are not necessary, but try to show both what borrowing has allowed you to accomplish as well as what responsibilities it requires of you.
Teaching good money skills to your children is no easy task, but it’s an important investment in their future. Money isn’t everything, but by showing your children how to manage it wisely, you can help them harness this important resource throughout their lives.