How to Teach Your Kids About Personal Finance
- 1). TEACH THEM THE CONCEPT OF EARNING
Sadly money doesn't grow on trees, but sometimes kids don't know that! A monthly or weekly allowance is a great way to help them make smart decisions and learn about opportunity costs. However, it's important they understand that their allowance isn't just falling from the sky. Introduce an incentive system where a portion of their allowance is earned by doing chores like helping with the dishes or mowing the lawn, getting good grades etc. Another idea is to add 'bonus' rewards for tougher tasks, or jobs exceptionally well done.
Don't always be too generous with the reward you offer them, so they can also learn to value their time - it's a good thing if your child turns down a low-ball offer and or asks for more, it means they are figuring out what fair price is for their services. It's also okay to up your offer when they ask for more, but be sure to call them out if you feel their asking price is too high! - 2). TEACH THEM THE CONCEPT OF SAVING AND INVESTING
When kids want something, you know they want it right there and then. They will beg, cry, give you puppy dog looks... whatever it takes for you to give in! It's important they understand, however, that they can often get what they want if they plan ahead and save up.
A great way to teach children about savings is by setting their eyes on the prize. When there is something expensive that they really want, tell them you will help them save for it by matching each dollar they put away from their allowance. Opening a savings account in their name is not a bad idea, but even a piggy bank will do. Help them keep track of how much they have, how much is left to go and how long it will be before they reach the goal.
Give them the option to withdraw from their account too, but make sure you tell them very clearly how much they are foregoing in interest and 'mom and dad' contributions each time they do so. - 3). TEACH THEM THE CONCEPT OF DEBT
Sooner or later your kids will be exposed to credit cards, student loans and debt in general. Many grown-ups don't take their debt seriously enough, perhaps because they don't understand how easy it is to get buried under all those interest payments.
A line of credit can give the illusion that cash is infinite, and that trivial expenses don't have much impact - this is a problem for so many Americans today! To teach your kids about debt and its costs you can offer an alternative to saving and building toward the goal. When they want something that just can't wait, give them an option to 'borrow' money from you. Make sure you explain to them that you will give them less on their allowance for the next few months to compensate for the extra you are giving now, and let them figure out if that is a good deal or not.
Make sure you follow through and do take out debt payments from their allowance, so they can feel the effect of their decision and start thinking whether it would have been better to save up and wait instead. - 4). KEEP THEM INVOLVED AND ENTERTAINED
Giving kids a long lecture about banking, financial math, the federal reserve etc won't really do anything for them so keep it simple and light hearted when you do discuss money and personal finance with them.
That said, make sure you include them when you have family discussions about money, spending and planning. Take them on trips to the bank, let them look at bill statements, etc. Being familiar with some financial words and concepts will only help them feel more comfortable when it's their turn to make these kinds of grown-up decisions!