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Managing money is something that everyone has to learn, and teaching children financial literacy can potentially save you and your family a lot of heartache when they grow up. But how do you teach financial literacy from a young age?
For parents who wish to teach children how to manage money, here are some important financial concepts you should teach, along with suggestions and resources on how to do so. But first, you should start by ...
Not giving Children whatever they Want
It's often tempting to stop a child from crying by giving them something they want. After all, that's often the only way for young kids to communicate their needs. However, crying when they want something and always getting what they want are hardly good habits at all.
To help your kids learn about money, the first thing is to simply stop giving things for free.
Once your kids understand that fundamental logic, then it's time to bring in the big guns. Here are the two concepts you'll need to teach your kids financial literacy - delayed gratification and money management.
Delayed Gratification
Delayed gratification is simply the concept that we should postpone small, immediate rewards in favour of bigger, more significant rewards in the future.
In other words, would you rather spend $7 a day on Starbucks, or save those $7s and get a Nintendo Switch after just a month of saving $7/day?
You can perhaps start off by doing some goal setting with your kids. What do they want? A new toy? A new game? A trip to the zoo? Once they determine what they want, then they have something to work towards.
Teach kids that these cannot just appear at the snap of a finger, and that they'll need to work hard for it to become reality. Want that new toy? Then they can't get any more new toys till then. It's a simple concept, but one that parents often neglect teaching kids.
Money Management
This is the bit that gets tough.
Start by introducing the concept of price - show your kids how you do the groceries, bring them to the shops, and show them the money you use to pay for goods and services. In short, show them how life outside the house works, and how much you have to work to put food on the table. In short, show them how money works.
Then, you can bring in the humble piggy bank as your kid's starter savings account. Encourage your child to save a little bit of their allowance each time you give them money, and work towards something they've always wanted.
On this note, there are 2 strategies you can use to reinforce these basic concepts:
- Start by setting short term goals to encourage saving money. Long term goals hardly work for kids because you want them to learn these fast, so set appropriate short term goals so they can easily see the fruits of their labour.
- Agree to match savings dollar for dollar - this is not only a great way to get them started on investing, but also further incentivises saving.
Subsequent Steps
After you've taught these two key concepts and your kid starts to save money, it's time to take it a step further - helping your kids earn money.
Letting your Children Earn Money
While getting allowance from you is a good start, kids really only start doing personal financial management when they earn their own keep. Set certain tasks around the household that the kids can earn money from doing. Now this isn't to say you should incentivise every task - you shouldn't, and kids should still rightfully contribute to the household without expecting pay, but you can set some extra tasks that they're not normally expected to do, like help change the aquarium water, or clearing up the trash. This not only helps them learn about earning money, but also their general knowledge. What's there not to like?
In fact, that's what Raja, one of our editors, does with his kids. He gives them 50 cents for every trash bag they tie up and throw down the chute, and for some other menial tasks. In fact, this worked so well that his kids ask him for more and even think about what they can do around the house beyond their responsibilities to earn money!
Starting Investments from Young
The next approach for older children is learning how to invest. You can easily set up custodial accounts for the kids and teach them about how money can grow, or you can get them involved in your own investments as well. Using a brokerage firm like Charles Schwab will do, or you can just set up something informal for your kids to start.
Being a Good Role Model
Ultimately, your child's financial literacy, their budgeting skills and how they value money depend on you.
It's an oft-neglected step, but one whose importance cannot be understated. And that's you. You need to set a good example to teach your kids the value of money. For example, if you expect your kids to set a budget, do so yourself. If you teach your kids to spend within their means, make sure you do too. Don't get that new Osim Massage Chair just because you can, but because you've saved up for it, and be transparent about it to your kids for their learning.
Ultimately ...
Financial literacy for kids is an important skill your kids need for the future, and parents play an important role in their kids' learning. If you manage to inculcate these values from young, rest assured that your kids will be carrying these lessons along with them for the rest of their life.
