You’re counting on your kids to grow up into financially savvy, independent adults, but unless you take the time to teach them good personal finance habits yourself, they might not.
Most American kids don’t take any personal finance courses in school; only 17 states teach personal finance in high schools and only six require students to pass a test in the subject before graduating. Even if you live in one of the states where personal finance is a part of the high school curriculum, researchers at Cambridge University have found that people develop their adult personal finance habits by seven years of age. If you wait until your kids are teens to start teaching them about money, it’s already too late.
You can begin teaching your kids about money when they’re toddlers. They may not be able to understand spending and saving yet, but they can begin to understand delaying gratification. As they get older, you can begin talking to your kids about your family’s finances, why you make the money choices you do, and how to spend their own money wisely.
Teach Kids How to Delay Gratification
Though kids as young as three to five years of age aren’t going to be old enough to understand talk of saving, budgeting, investing, and the like, you can give them a solid foundation by teaching them to wait for the things they want. If your child wants something, talk about the importance of waiting to get what you want. You don’t even have to relate the concept to a purchase — when your kid gets impatient to go to the park or a friend’s birthday party, for example, take the opportunity to talk about how you can’t always have everything right away.
Give Your Child an Allowance
If you can afford it, give your child a small weekly allowance. It doesn’t have to be big; a few dollars is plenty. It will give him or her some money to practice spending, saving, and giving to charity. Help your child learn about these concepts by creating three jars — labeled “spending,” “saving,” and “giving” — and when you give your child his or her allowance, talk to him or her about dividing the money up. Make sure you do the same with any windfalls your child may receive, like birthday or Christmas money.
Have Your Child Set a Savings Goal
It may be a little early for your six- or seven-year-old to start saving for retirement, but by the time he or she reaches this age, he or she should be able to grasp the concept of saving for a goal. Have him or her come up with a savings goal of his or her own, like maybe a toy or game he or she wants to buy. Make sure the item doesn’t cost so much that your kid won’t be able to save for it within a couple of months. If it is that expensive, consider matching your child’s savings contributions so that he or she can save up the money faster. Encouraging your child to save for something he or she wants will teach him or her to wait for the things he or she wants and to make important decisions about how to spend his or her money.
Talk About Family Finances
At six or seven years of age, your child is old enough to begin learning about the family finances. That doesn’t mean you need to burden your child by regaling him or her with stories of the family’s financial difficulties. But tell your kids how much money you earn, and explain where that money is going and why. Don’t forget to talk about gross versus net income and things like the Social Security tax.
When you go shopping, talk to your kids about why you’re making the purchasing decisions you’re making. If you’re shopping for food or other household necessities, let your kids make a few of the decisions, within parameters. Teach your kids to comparison shop — talk to them about how generic food products are cheaper but very similar in taste to brand name items, or how buying a larger package of something will often get them a cheaper per-item or per-ounce price.
As your kids approach their teen years, begin talking to them about investing. Discuss how vital it is to invest for retirement and to start doing so at a young age. Talk to them about compound interest, being as specific as possible — using numbers in your explanation will make the information more compelling and help your kids grasp the lesson.
Teach Your Kids About Credit
Credit is a complicated topic, so you may want to wait until your kids reach their pre-teen or early teen years before talking to them about loans, credit cards, interest, and debt. But it’s important that you talk to your kids about credit, including credit cards and college loans, before they start applying for college. That way, they’ll be better equipped to make smart decisions about student loans.
If you think you can wait until your kids are older to start teaching them about money, you’re setting yourself up to make a lot of small personal loans when your kids are young adults. Start teaching your kids about money at an early age, and they’ll repay you by growing up to be financially stable and responsible from the time they leave home.