Anne-Marie Vettorel 2018-10-02
In a consumer society, teaching children about money is paramount. As Robert Kiyosaki puts it in Rich Dad, Poor Dad, “without financial literacy and the knowledge of how money works, they are not prepared to face the world that awaits them, a world in which spending is emphasized over savings.”
Teach kids the difference between wants and needs
Even preschoolers can distinguish between needs and wants, and as children grow older, they can make more subtle distinctions between the two categories (the lines get blurry, for example, when we look at designer jeans and restaurant spending—technically, yes, clothes and food are needs, but there are deceptive ways that our wants burrow themselves into our needs).
Talking explicitly about wants and needs in a casual but recurring way helps kids learn these lessons early.
Comparison-shop with your kids
The grocery store is the perfect financial literacy classroom. With various versions of the same product, children have the opportunity to weigh the costs and benefits of purchases, and calculate unit prices.
If your family has a favourite brand of something, because it tastes better or is made with better ingredients, this is a good time to talk to your child about how that could be worth a financial trade-off. Looking at the prices of electronics, in flyers and online, could teach kids a different lesson: that it’s sometimes possible to find the exact same item for cheaper after shopping around a little.
Teach them to pay themselves first
Sometimes, kids find themselves in possession of small amounts of money with zero instruction as to how it should be handled. This, personal finance author Neale Godfrey said in an interview with Real Simple, encourages them to “grow up thinking it’s all meant to be spent.”
Instead, use a system of clear jars or piggy banks to help them develop the habit of dividing up their income into categories like “spend,” “give,” and “save.”
Help kids create a “wish list” and a savings plan
Now that your kids are dividing their money up into jars and putting, say, 20 percent into savings, you can talk to them about what they want to save for. Maybe they know exactly what they want, or maybe they need some time to hash it out with you and choose between various options.
At this point, you can talk to them about how much their desires cost and how frequently they’ll need to contribute to their savings in order to earn them.
Give kids an opportunity to earn money
Personal finance writer Dave Ramsey says that kids should be given “commissions, not allowances.” This means that parents should pay their kids for completing household chores, such as mowing the lawn or cleaning their rooms, to teach them that money is earned, rather than giving them weekly allowances that don’t teach them anything.
Open a savings account
A great way to teach kids early lessons about financial responsibility is to help them open a bank account and take them to the bank on a regular basis to deposit and withdraw money.
Visiting a bank branch in person makes the experience of saving tangible, and will help younger kids understand the very concept of the bank—that it holds your money for you and helps it grow.
Explain compound interest
Now that your child has a savings account, he’s probably earning a small amount of interest on his money. Take the time to explain what that number on his statement (or in his bank book) means—that he’s earning interest on both the money he deposits into the account and on past interest.
The amounts on your child’s bank statement are probably quite small, so try doing some hypothetical compound interest calculations with larger numbers so that your child can see what a difference it can make over time.
Explain credit cards and debt
Credit is a more complex topic, but as soon as kids reach their “tween” years, you should start having conversations about it. It’s important that these conversations be nuanced, as the message that “credit cards are bad” is overly simplistic and, in some ways, inaccurate.
Along with discussing the concepts of borrowing and interest, you should talk about what a credit history is, and how it is built and maintained. If your kids borrow money from you, you may want to impose penalties on any late payments so they learn the consequences of poor planning.
Let kids buy stock, literally or using a simulator
Showing kids how the stock market works (and introducing important concepts like risk, volatility, and diversification) can be done by buying them a little bit of stock in a company they like, so they can see how it fluctuates and (hopefully) grows over time.
As your child develops a more mature understanding of this and learns about boom and bust cycles in her history classes, you can talk about investing in recession-proof industries and how the economy affects financial markets.
If you feel uncomfortable literally buying stocks for your child, you can introduce her to an investing simulator like the Stock Market Game.
Talk to your kids about taxes
First, explain the general concept: kids should know that everyone in the country pays taxes to keep roads paved, schools and libraries running, and parks well-maintained. In Real Simple, Neale Godfrey suggests that, when your child reaches the age of 10 or so, you start taxing the earnings from his chores at a 15 percent rate and voting as a family on how this money will be spent.
Let your children make money mistakes
It’s hard to watch kids mess up—but you have to let them so that they apprehend early the consequences of financial recklessness. If your child wastes money and experiences buyer’s remorse, have a conversation about it instead of swooping in to try to replace the money or soothe feelings of disappointment.
Be transparent about what it costs to run the household
Personal finance writer Suze Orman advocates for sitting down with older children once a month and paying the family bills together. Since those payments likely happen online, Orman suggests handing the mouse or the trackpad over to your child and having them input the payment information so that they learn by “actually doing something.” This teaches kids how bill payments work, and also gives them a sense of how much it costs to run a household.
Consider enrolling your child in a financial literacy program
If you live in the United States, there are plenty of organizations teaching kids how to make sense of money, through means as diverse as tech and the performing arts. If you don’t have access to these programs, Warren Buffett’s Secret Millionaires Club teaches financial literacy and entrepreneurship through a series of animated online videos.
Teach kids to think critically about branding and advertising
During trips to the grocery store or the mall, you’ll have the opportunity to discuss branding with your child. Explain to them that just because something is in generic packaging or doesn’t have a flashy logo doesn’t necessarily mean it’s of inferior quality—an important lesson in both financial and media literacy.
Talking about the “tricks” of advertising with your child will help them engage with media in a more sophisticated way, helping them make smarter spending decisions in the long run.
Encourage kids to start a small business or side hustle
Support your child’s lemonade stand or babysitting business, and encourage him to think of unique ways to earn money before he’s old enough to get a traditional summer job. Crafty kids could open an Etsy store, for example, or sell tickets to a screening of a movie they’ve made—there is a multitude of possibilities, and some could even get kids thinking about creative careers they might enjoy.
Meet kids halfway on larger purchases
Sometimes kids (especially older kids and teenagers) want things that are too expensive for them to conceivably buy for themselves (a band trip, a snowboard, and lessons, etc.). In these cases, you could implement a dollar-for-dollar matching program. The kids will have some skin in the game and will think more critically about how much they value these big-ticket purchases.
Teach kids to think critically about social comparison
Children pick up a lot from society, including classist messages about how more money makes you a “better” or more attractive person. Personal finance writer Gail Vaz-Oxlade words it strongly: “equating our ‘stuff’ with our self-worth is an illness. Inoculate your kids against this virus.”
This sense of self-assuredness will help kids avoid making purchases just to keep up with the Joneses.
Talk about online shopping, banking, and data protection
More and more, our financial lives are lived online, and it’s important that kids grow up with a basic understanding of cybersecurity so that they don’t expose themselves to fraud and identity theft when they’re older. Start with simple lessons: don’t share passwords, even with friends, and be very careful where you enter your credit card information.
Teach kids that giving back is just as important as spending and saving
Remember the clear jars we set up? One of them was labelled “give,” and it’s already collecting money for charity. Kids are often passionate about world issues, animal rights, the environment, or helping those less fortunate, so help them navigate the non-profit landscape so that they can make a difference with their dollars.
Model good financial habits
Kids pay more attention than parents sometimes realize, so if you’re buying impulsively or living outside your means, eventually, your kids are going to catch on. Modelling good financial behaviour doesn’t mean you have to be perfect in every way, but if you do make a mistake, like miss a payment on something, explain it to your child calmly and discuss your plan to rectify the situation.