Children and Money
While children learn the 3Rs at school, very few will learn how to manage money unless they choose finance as a career path. This means that if you want your child to become an adult, ready to face the financial challenges of living, you need to learn and to teach your children about managing money.
If the lesson is taught and learned at an early age, the benefits will be evident now and in the long term. You can help them to develop strong saving habits, learn how to make sensible use of their money, to invest and to understand why “one belly full does not fatten a boar”. These lessons and the associated behaviour will translate into life long practices on avoiding consumer debt, saving for the future and becoming financially secure.
The key lessons you will need to cover are:
- Money is earned: Even very young children can understand the concept of earning money. You can discuss with your children how money is earned by working and that you can only spend what you earn. Creating a regular allowance gives them the experience of being paid on a schedule and gives you the opportunity to teach them how to set goals for how they spend and save their allowance. Whether or not allowances should be tied to household responsibilities is up to you. Although many people say children will learn more about personal responsibility if they are NOT paid for pitching in around the home, others feel it teaches them valuable lessons about working and earning.
- Add interest to Saving: Encourage your children to save a part of their allowance for a special goal. As they save money, you might reward them with a small additional amount, just like a bank pays interest. At the end of each month, calculate how much they have saved and then chip in a certain percentage as interest.
- Banking, Saving and Borrowing: Once your children have been saving enough to accumulate $100 or $200, take them to the bank or credit union to open their first savings account. Many institutions allow children to open first accounts with low minimum deposits.
- Once your children have mastered saving, you can begin to teach them about borrowing. When your children want something that they do not have the money for, discuss the value of saving versus borrowing. If you want to borrow from you, use a written IOU, establish a repayment schedule and charge interest.
- Compounding: As your children get older, encourage them to take part-time jobs to earn more money, so their savings will likely increase at a faster rate. This will allow you to explain compounding and how it can be more dramatic over time. This can lead to a discussion about investing early in their lives and the importance of time in investing.
- While teaching your children about finances can seem daunting, you too will learn and you can help put your child on the right track by encouraging good financial habits.