Written by: Jamie Stolz, CFP®, MBA
What's your first memory of money?
As new clients begin their journey with TandemGrowth, one step in our consistent, time-tested process is the deep discovery phase which includes discussions and questions to help the client and advisor uncover "What Matters Most" to the client. The question quoted above is one example. Our clients range in age from their 30s to their 90s and it's obvious from their answers that financial habits and feelings towards money formed at a very young age.
For many parents, the idea of having the "money talk" with their kids can be overwhelming or easy to put off until later. Parents often don't know where to start or how to best instill financial literacy into their kids. Unfortunately, most children will have little to no exposure to financial lessons in school. When not properly prepared, children grow into adults who may lack money skills affecting their finances, self-esteem, relationships, and overall ability to enjoy life.
Start with the following four tips for teaching financial literacy to your kids.
1. Start Young
Before the age of seven, introduce kids to coins and cash. Explain the basics of what money is and how it is used. Let them see you make purchases with cash. We've had this play cash register since my 8 year old was a toddler. We've advanced from sorting coins to adding and subtracting money to playing "store". From an early age, teach the basic concept of wants and needs as it relates to financial decisions.
2. Let Kids Experiment
One effective way to help kids learn how to make budgets is to give them the chance to make mistakes on their own. A small allowance each week is the perfect incentive for children to learn how to budget. It's important to teach from a young age that money isn't just for spending--saving money regularly will teach them discipline and the idea of delayed gratification. Do they want to spend this week's money on candy and a cheap toy, or save up a few weeks to get something they really want? Of course, some children will still be impulsive and want to spend their funds right away, but better you let them learn the lesson with $10 than with $10,000 later in life.
Get them a piggy bank or savings jar to help start the habit of saving. Encourage them! "Saving is a great habit." This divided piggy bank has been a great visual way in our house to teach our kids about different buckets for SAVE, SPEND, and SHARE.
As children get older, you can encourage them to save for the future by offering to match the amount they save dollar for dollar or a certain percentage. When they're old enough to move from a piggy bank to a real bank, you can use services such as Greenlight or FamZoo which include features like prepaid debit cards and apps for parents to monitor, transfer money, and pay interest. Be sure to research and understand any fees involved. This is a great time to explain that money has time value. Currently, interest rates are very low so in the short-term they may not see much growth in a savings account.
Tweens and teens should also be taught about credit - borrowing from others at a cost. You can use online debt calculators to show how interest adds up on a loan. Explain to them how credit scores work and that it is like their "permanent transcript".
2. Include Children in Household Budgeting
Do you have a shopping or entertainment budget each month? Try including an older child on budget planning for the next month. Kids learn quickly when they have to stay home bored for two weeks because they spent the entertainment fund during the first half of the month. Another great idea is to set a grocery budget for an upcoming trip, make your week's list, and then take your child to the grocery store with you. As you place items in your cart, have your child add up the cost of each item until you hit your limit.
Kids learn more from what you do than what you say. If comfortable doing so, talk through decisions in-the-moment; like if you're holding off buying something you really want, explain why to your child to help reinforce long-term financial habits and teach that money is finite.
3. Gameify It
Turn budgeting and saving money into a game. Give your shopping lists to your younger kids and let them search online or in the newspaper for coupons and sales. Maybe you could promise to put a percentage of the money they save into a bank account for them to purchase something special down the road. Playing board games with a financial element like Monopoly or Life helps kids learn the importance of budgeting and planning for the future.
You could even encourage older children to learn lifelong investment skills by participating in a stock trading simulator such as The Stock Market Game. Explain that investing comes with the risk of losses in a down market but that over a long period of time has the potential to grow significantly.
4. Make Them Earn It
Knowing how to save, invest, and spend money is important, but one of the best things you can do for your children is to instill a good work ethic in them by letting them earn money on their own. Whether your teen works part-time at the movie theater, or you help your little ones start a lemonade stand, the willingness to work hard and be rewarded is one of the best financial lessons you can pass on to them.
Ally Bank provides a fun, free online book to help kids learn the fundamentals of budgeting, smart saving, and giving back to their communities: click here to read Planet Zeee and the Money Tree.