It’s never too early to begin teaching children about money,” said Matt Wegner, certified financial counselor (www.financialexcellence.net). “As early as three or four years old, kids are able to learn some basic concepts that will prepare them for the life skills needed to survive as adults. The learning process continues through young adulthood and even through college.”
So how can you begin teaching your child about money? Matt outlined some great advice to help raise fiscally responsible children.
Lead by example
Kids learn a lot from watching their parents, and they model their behavior after adults. If they see mom and dad using the credit card for each purchase, they learn that you should use a credit card for every purchase.
If you use your bank card rather than carrying cash, try to find opportunities to let them realize the difference between “borrowing” money via credit cards versus taking money out of your bank account.
Matt reminds his children that they only spend money if the purchase is planned ahead of time and is in the budget. He’s used dollar bills to illustrate the concept of borrowing with interest. He lets a child ‘borrow’ $10 to do whatever the imagination can conjure, then he demands they pay him $11 back as a fee for using my money. Of course they don’t have the extra dollar to pay back, so it’s a powerful illustration on how interest works and how borrowing money is a bad idea.
Openly discuss budgets and paying bills on time
Talking about money with your children, and how just because you are getting change back for a purchase, that doesn’t mean you are making money. The more you can teach them about how to budget and pay for things, the more likely they will understand how money works.
If they see mom and dad communicating about money, doing a written spending plan each month, and sticking to the spending plan, they learn how to control their money in a positive way.
If they see mom and dad fighting about money on bill night, they learn that fighting about money is just what adults do.
Let them earn money
Allow children to earn money. Break up some household chores and have the kids earn their pay, rather than give them an allowance. It teaches children that money isn’t free and they need to work to earn the right to spend money. This works for kids of all ages. It doesn’t have to be a lot of money, only a few dollars per week, but it’s a powerful lesson to teach them.
However, be sure that they know that some chores they are required to do simply because they are a member of the family. Making a list of expectations – like making the bed, clearing the table, feeding the dog, etc. – can help set the boundaries.
Let them spend their money
When you go to the store and your child wants to buy something, make it a rule that he/she has to bring his/her own money or the item doesn’t get purchased. If a child worked for their money, he/she will be more likely to spend wisely than if you just give money whenever he/she asks for some.
When they are younger, it might be household chores they get paid for, but as they get older they can do extra chores. Then they can exercise more responsibility with their chores and do more physical chores like raking leaves, mowing, shoveling snow, etc.
Allow children to help plan for purchases
When it comes to purchasing necessities like clothes or school supplies, involve the kids in the shopping process. Set a spending limit and put cash in an envelope for the child to spend from.
Matt’s daughter learned very quickly that $30 doesn’t go very far when buying new clothes and the latest fashion in backpacks. So, after eyeing out a trendy backpack and one outfit that spent her whole clothing budget for school, she decided to put them back and buy a less expensive backpack and clothes from the clearance rack. It was a painful process, but she learned a lot from that one moment and she has a better understanding of the true cost of everyday items, as well as how to set and stick to a budget, or spending plan.
There are also online games that, when guided by an adult, teach children that items have value. Games found on such popular sites as Webkinz let children earn “money” to buy items for their pet. They quickly learn that when you sell something, you might get something back, but not nearly as much as the item cost the first time. It’s a nice introduction to seeing how purchases should be made wisely from the beginning.
Learn to save
You have the opportunity to teach your children to save and for them to make it a habit. Matt recommends putting their money in cash envelopes, or for younger children, clear piggy banks so they can watch it grow. He suggested using three: one for giving, one for saving and one for spending. You can help them decide what they want to save their spending money for and how long it will take to save up enough money to buy the item.
As the kids approach the teenage years and working age you can switch to a bank account and teach them how to balance the account as the statements come in. You can open a checking account for your teen and require them to keep the register current and balanced. This works great as they start saving their money for some more sophisticated goals like cars, college, etc.
Avoid sending mixed signals
Kids get confused when you tell them they can’t have something they want that isn’t in the budget, but then you buy yourself a new boat, jet ski, car, truck, or any other expensive item on an impulse and have to borrow money to make the purchase.
They also notice when you spend money you don’t really have on coffee, fast food and dinners out. Children pick up on these vibes and they know you’re telling them one thing but doing something else.
Watch how money is used as a reward
Money can be used as a reward for showing an increased capacity to handle responsibility, i.e. doing more chores around the house or babysitting but not for things that are expected on a daily basis, like good behavior or keeping the room clean, because the kids may start to expect money for everything. These things should be rewarded with positive reinforcement as part of the parenting process, and you want to teach kids that there are certain responsibilities that come with life.
Save the monetary rewards for when the kids go above and beyond the normal expectations.
Know your limitations
We’re all wired a little differently and that’s what makes us unique as human beings. Some of us are naturally better at understanding certain concepts than others. But that doesn’t mean not everybody can be good at handling money. It simply means that it’s easy for some people to learn and harder for others.
Some of us are natural savers and some of us are natural spenders. But a large part of personal finance is learned behaviors, which means everyone can be good with money if they are taught how. Some of us just need to work harder at learning the good money behaviors than others.
The community offers a number of resources to help with finances, such as financial consultants (like Matt), banks and consumer credit counselors, so don’t be afraid to ask for a little help along the way.