When it comes to money matters, ignorance is not bliss, and what you don’t know can hurt you. According to a National Endowment of Financial Education report, only 24% of millennials demonstrate basic financial literacy.
There is no shortage of statistics on the current state of financial illiteracy. With state-mandated personal finance programs being few, the task of teaching financial literacy falls largely on parents. Although some may find it difficult to teach their kids, experts say a degree in finance is not necessary. Therefore, parents are encouraged to adopt a proactive approach to reverse the current trend by raising financially literate kids.
Why Kids Need To Be Taught Financial Literacy
Financial literacy and being able to make prudent financial decisions can have a critical impact on many important aspects of children’s lives. Here’s how:
- It helps kids to understand the value of money
- Kids can learn how to earn, spend, and save money
- They can use money to fund their goals
- It enables them to secure their financial future
With the goal of financial literacy in mind, you may consider passing on these nuggets of financial wisdom to your little ones. These lessons can help teach your kids how to best manage their money.
Create a Family Financial Mission Statement
Families may consider creating a family financial mission statement as a way to build consensus about long-term financial goals. Structurally, the written mission statement can be whatever the family members agree it should be – a few paragraphs or a page or two. It doesn’t need to be cast in stone, it can always be revised yearly.
As for the age of the participants, it can start in very basic form with younger children and the process can mature as they age. Have an open conversation with the children to encourage them to think about the value of money, the challenge of earning it, and the importance of saving.
Involve Kids in Daily Financial Activities
Talking to the little ones about basic, everyday transactions and purchases, enables them to understand money as a tangible rather than an abstract concept. You can let them watch you write a check, talk them through how to use an ATM, coach them on proper credit card use, or talk about money during dinner conversations.
The conversations can revolve around paying bills, budgeting, or investing. It’s okay if they’re too young to participate, since the goal is to simply get comfortable talking about money as a family without any stigma or stress.
What Is Money?
Even though kids need to know what money is and how it’s used, many adults take this knowledge for granted. For them, it’s a new concept and, to help them understand it, parents can answer the basic questions. Since kids are curious, be sure to present it in a way that satisfies their quest for knowledge.
You can teach them about money by using real money. Try teaching them the names of coins and small bills, then use them to practice counting. A great idea would be to involve them when you’re shopping. Whenever you purchase a low-cost item – like a book or a cookie – remember to talk about how much money it costs.
Money Doesn’t Grow on Trees
Financial experts advise parents to teach their kids where money comes from. They need to know that money doesn’t grow on trees, and it also doesn’t just come from mom or dad’s wallet. Even though it’s easy for them to imagine that money is something that magically appears when they need it, you need to help them understand that money is something that is earned.
To achieve this, you can promote the value of “work”, and wages with simple jobs. For instance, your toddlers could sort dirty laundry, empty bathroom trash cans, or pick up dog toys before mom or dad maws the lawn in exchange for some money. Keep in mind entrepreneurial ideas as well. You could let your child collect your family’s recyclables and return them at the store for a deposit credit. A lemonade stand could also be a good business opportunity for them. You could also teach them ways of saving money, like turning off the lights or the AC system after you leave a room, turning off the TV if it’s not being used, so on. That way they will learn not only how to earn, but also the importance of saving as well.
Prioritize Needs over Wants
The difference between wants and needs is crucial to making sound spending decisions as an adult. Starting now, when your child’s wants and needs are small, builds a strong foundation for their future. They need to learn that while needs are things we can’t survive without (food, shelter, clothes), wants are everything else. To ensure that your kids can differentiate needs from wants, they can chip in to help you pay for home improvements and decorations. This could be their way of helping with the family’s financial mission statement.
Playing is one of the best ways to teach young kids. You can use a matching game to help your child differentiate between wants and needs. As they mature, giving kids pocket money or an allowance that they must use to cover some of life’s essentials is a fantastic way to teach them how to prioritize needs over wants.
The Importance of Budgeting
Great budgeting in adulthood is a skill that starts by teaching your children how to keep track of their money. Knowing how much money they have and what will be left after they use it is a great starting point.
Given that kids learn best from what they see you do, consider bringing them in as you prepare your monthly budget. Let them practice how to budget their money by giving them three piggy banks instead of one. One can be labelled ‘spend’ one ‘save’ and one ‘give’. Anytime your child gets money, encourage them to split the money up between all three banks.
As previously stated, money isn’t all about earning and spending. Saving is a crucial component of building wealth and having a secure financial foundation. Saving doesn’t mean that kids don’t get to spend the money they make. Rather, help them understand that it allows them to make future purchases that they otherwise wouldn’t be able to afford.
You could help your kids distinguish between money to be saved and money available to spend by having them write down their saving goals. Parents can also give kids incentives for saving by matching every dollar a child saves.
Financial consultants strongly recommend helping kids to save for the long term. You can do this by helping them open a custodial bank account or finding kids debit card options that are easy to handle. These could teach them the value of saving and introduce them to the banking system.
For some adults, finance lessons were learned through harsh life experiences. However, this doesn’t have to be the case with your children. With these tips, your kids may hopefully mature into money-wise teenagers and, eventually, young adults. As Mac Duke, the strategist, said, “Financial education is more important than money.”