Just like saving for retirement, when it comes to teaching your kids about finances, the earlier you start the better. A recent study from the University of Cambridge found that kids form their money habits by as early as 7 years old! And at that age, the number one way they are observing money transactions is through their parents.
So model proper financial responsibilities for your kids and give them a head start on money management in life. Because kids are always watching— even when we least expect it!
Starting conversations about money early will not only better prepare them for the future, but as a parent, you can build on their knowledge as they grow and ease into more difficult concepts. Here are 5 tips for teaching your kids about finances— you may even learn a thing or two about your own finances!
1) INTRODUCE THE CONCEPT OF MONEY
This is something that a lot of parents may overlook. While the concept of money is crystal clear to us, seemingly arbitrary pieces of metal and paper that we exchange for objects can be a weird concept for young kids to wrap their heads around at first. That’s why it is important to teach them the value of currency and the differences between cash and coins.
Next, have them save their money in a clear jar so they can actually see their pile money get bigger. Whenever they add money to it, talk them through it and make a big deal out of it so they feel rewarded and satisfied for saving! This also a great time for you as a parent to examine your own attitudes and behaviors with money and figure out what lessons you really want to pass down to your kids.
2) GIVE YOUR CHILD AN ALLOWANCE
This one is a classic for a reason! An allowance is an easy way to help teach kids how to manage money and encourages good saving techniques. How much you give them as an allowance is ultimately up to you. Here are some things to consider when deciding an amount according to the Government of Canada:
- Choose an amount that is appropriate for your children’s age. For example, an 8-year-old should get less than a teenager.
- Start with a small amount and increase as they get older.
- Talk with other parents you trust to see how much they’re giving
- Decide what expenses your children will have to cover with the allowance. For example, your teenager might need to pay for their own movie tickets and gas for their car, but you will still pay for school supplies.
Another important thing to consider with allowances is whether or not you want them to be linked to work. Finance expert Dave Ramsey says that allowances should be given in exchange for chores to show your kids that money is earned.
However, for some families, allowances are used as tools to teach good saving habits and the work aspect isn’t involved. In either case, make sure you establish rules with the allowance and that everyone is clear about them.
3) SHOW YOUR CHILD HOW TO SPEND SMART
Now that your kids have got some money coming in from their allowance, they’re going to want to spend it. But before they buy something, show them how to shop around for the best deals and teach them to compare prices between different brands.
Furthermore, show them what else they could buy with the same amount of money. This will teach them the importance of weighing different options and making decisions. You could say something like, “if you buy this jacket then you won’t be able to buy that video game.”
This is also a great time to discuss advertising and peer pressure— how marketing campaigns can influence our purchasing behaviors. This will help them make informed decisions and discourage impulse buys the next time you take them to the toy store.
4) MAKE THEM TRACK THEIR SPENDING
When your child knows exactly where their money is going, this will help build their budgeting skills. This can be started with children of any age.
There are many fun and interesting ways for kids to track their spending money:
- Have them write each amount they spend in a colorful chart (great for visual learners)
- Write it down in a notebook
- Entering it into a computer spreadsheet
- Use apps that track their spending and saving (they’re already on their phones anyway!)
While they are keeping track of their own finances, this is also a good time to let them participate in the family budgeting plan. Let your child see you how you plan for emergency expenses, pay bills, shop carefully, and plan for vacations. Leading by example is always the best way!
5) TEACH YOUR TEEN ABOUT INVESTING
This might sound like a big step for your kids, but Dave Ramsey argues that “the earlier your teen can get started investing, the better. Compound interest is a magical thing! Introduce your teen to it at an early age, and they’ll get a head start on preparing for their future.”
Now, throwing your child in the world of investing with little prep is a recipe for disaster. But when they are old enough to understand interest rates, try playing an investment game to learn about investment strategies, how the stock market works, and financial risks. You’d be surprised how much they can learn from apps and website games.
Bottom line: the best thing you can do for your kid in terms of money is to model healthy financial behavior. Kids pick up whenever you’re stressed about bills or frivolously spending and in turn they internalize those behaviors as they get older. So lead by example and use these tips to set your kids on the right path to financial well-being!