It is never too early to introduce financial management ideas to kids, allowing them to make good financial choices throughout their lives. Teaching kids about financial management at a young age will help them in their adult years, as well as serve as a model for other financial decisions they make in the future.
Here are six tips that will help you teach your kids about financial management
1. Make sure they understand how much money comes into the family budget each month
Your kids need to know how much money is coming in each month, as well how much of that income goes towards fixed costs. The idea behind budgeting is managing how the rest of your family's monthly income gets spent and how you can set aside some savings for future use.
You might want to practice with them using a simple balance sheet equation: Income - Fixed Costs = Potential Savings
It's important to teach children about what are considered "fixed costs." These are things like rent or mortgage payments, car payments, child care expenses, student loan repayments (if you have any), etc.
Your kids will understand more clearly why it's so difficult sometimes when parents say no to their requests for new toys or other items on impulse.
Finally, you might want to teach your kids how debt works and how it can impact their future.
Debt is a big topic that's typically not talked about too much in our society so it may take time to go into detail with them on how this can negatively affect other parts of life like credit ratings, living standards, etc.
It's important for children to have an understanding of how they work before enlisting them as partners in the family budget or helping them make decisions around borrowing money from friends or relatives without any prior thought (i.e., if they need help paying off bills).
2. Teach them how to set aside some of their allowance for savings
When kids earn an allowance, they face financial choices about what to do with their earnings. You can teach them about saving money by giving them a small allowance and teaching them that they need to save some of it for the future.
You'll want to give your child specific guidelines so they will know how much of their income needs to be saved, as well as what should go towards saving on an ongoing basis. For example, you might decide the first 50% is put into savings and then anything over that amount goes toward spending or giving. Any leftover amount goes back into saving funds each month. This could get adjusted in different increments depending on age or other factors like family size.
Make sure children understand why saving money helps and how it can boost their net worth
. One way kids learn from observation is seeing adults make financial decisions around large purchases when there's not enough money in the budget to buy what they want. In moments like these when your normal budget can't afford the purchase, you can tap into your savings as an added financial boost to give you more financial wherewithal.
Because this can come in handy when you need some added financial resources, you might want to do the math together and set a saving goal with your child. Then, you can break down how much they can save each week or month. Talk about when it's time to spend their savings on things that make them happy ("We're saving for _____" is also an important lesson in delayed gratification). After all, if you teach kids how saving works from the beginning and start tracking what expenses are fixed versus variable (e.g., grocery shopping), it will be easier as they grow up because they'll have experience making good financial habits
3. Talk about credit cards
Kids absorb everything like sponges. So, try teaching them about ways of using credit responsibly before introducing them to credit card
usage at too young an age.
When your children are old enough to have credit cards as authorized users on your account, you might want to talk with them about the different types of cards available and what they're used for. You'll also want to talk about how carrying a balance on their card can negatively impact their credit score in addition to the interest payments associated with that balance.
For example, if your child has a $500 limit and they spend $400 over an extended period of time without paying off the total balance at month's end or neglecting to pay the minimum balance at all, then this would result in high-interest charges as well as higher monthly balances when it comes time for another billing cycle. If the latter happens too often over several years, it will affect their ability to qualify for loans or mortgages later on down the line because they'll have a lower credit score.
Instead, consider using debit cards rather than credit cards.
Kids should be introduced to debit cards at the age of 13 or 14 years old, and you can wait until they're 16 if they show that they understand the need for budgeting responsibly (you could also introduce them earlier with these discussions). They even make kids debit cards
specifically designed for introducing them to debit cards with parental controls. These effectively work like prepaid debit cards
, meaning you can only spend money you've loaded onto the card.
One thing is important: teach your child how debit card transactions work before giving him/her their own card so there are no surprises down the line. For example, because debit cards require access to funds in real-time, any purchases made using it will subtract from your account balance
immediately -- which means they won't know exactly what's going on financially unless you go over this information together when teaching them about it.
Further, debit cards are associated with checking accounts, whereas credit cards allow you to make purchases without using cash or a line of credit that must be repaid at some point down the line.
The main takeaway from this discussion is that when someone uses a debit card and they don't have enough money in their account, it will automatically stop them from making any additional transactions until there's sufficient funds available -- which can help kids understand why saving up for large purchases is important so they're not left empty-handed come bill time (or even worse, get hit with overdraft fees).
4. Show them how paying with cash can be different than using credit cards
This might be a conversation you should save for when your children are younger than older because seeing the power of paying with money you have instead of money you may have later can yield dividends over time.
For example, cash transactions can't involve interest rates because they don't carry an outstanding balance over time and therefore there's no need to pay it back like there is with credit cards. Plus, customers know exactly how much money they're spending at the time of checkout because cash doesn't have a billing cycle -- which means it also helps them understand delayed gratification better.
5. Let them know that it's okay to spend some of their money but not all of it on something they want right now
Some people still believe that spending all of their money on something they want right now is a better approach to handling finances. Wrong!
This will quickly lead to the realization of not being able to purchase anything else and no more spending for a long time, which can be frustrating for kids who are used to making spontaneous purchases with ease -- but as we've already discussed, it's important that you teach your children about delayed gratification at an early age so they don't make impulse decisions later in life without even realizing what they're doing. It doesn't take much work or effort on your part: just tell them, "We have enough money today for this one thing!" But then remind them again tomorrow when temptation strikes. If done consistently, you'll be able to successfully teach your child spending wisely and balancing wants vs needs.
6. Invest for later
This may seem like a no-brainer, but when your children are spending their money on what they want now, show them how there can be so many other things to invest in for the future
For example: invest small amounts now with micro investing apps
, often seen as the best stock trading apps for beginners
, and you'll have bigger savings later down the line that will allow you to purchase more than just one thing if it's really necessary -- which means less disappointment overall. Just make sure not to overshare with kids because they don't need all of this information at once! You might even create an account for them or direct deposit into a college fund or something similar as a way of teaching them about "saving" from an early age without having any idea what these funds will actually be used for in the future -- another way to teach delayed gratification.