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5 Tips for Teaching Children Personal Financial Literacy

Mon, Sep. 11, 2017 Posted: 07:15 AM


As a parent, you have a lot more influence than you realize. However, as kids get older, you lose some of this influence as the momentum shifts towards peers and figures outside of the home. That’s why it’s absolutely imperative that you start teaching them smart principles as early as possible. In particular, you need to be teaching them about personal finance.

Teach Your Kids to be Financially Savvy

In today’s day and age, it seems like financial literacy is increasingly rare among young people. It’s not very often that you run across someone who is 18-, 25-, or even 30-years-old and knows how to properly manage money, save, and invest. In fact, most are doing a pretty poor job.

Research shows that one in five millennials have yet to start saving money, while 30 percent don’t even have a savings account. Among those who do, an astounding 40 percent have less than $5,000 tucked away. More than half of millennials have nothing saved for retirement, while 40 percent worry about their financial future on a weekly basis.

Parents of millennials are partially to blame for these poor numbers. While the onus is ultimately on the individual to take responsibility over his or her own financial state, most parents haven’t done a good job of teaching kids financial literacy.

You can break this cycle by stepping up and showing your children how to be financially savvy from a young age. Here are some lessons and principles you should teach them:

1. Money Doesn’t Grow on Trees

Young children often have no concept of money. They assume that you can just go to the store, buy something, and that’s that. While this is fine for a toddler to think, it’s a dangerous way of thinking for a five-, six-, or seven-year-old.

Unfortunately, we have a lot of young people walking around who were never taught about the value of money and experience huge shock when they enter the real world and find out that money doesn’t grow on trees. By teaching this principle early on, you can set them up for success in the future.

2. Give Commissions, Not Allowances

“Don’t just give your kids money for breathing. Pay them commissions based on chores they do around the house like taking out the trash, cleaning their room, or mowing the grass,” financial advisor Dave Ramsey says.

When you give your children commissions, you’re reinforcing the idea that money doesn’t grow on trees. You’re showing them there’s a direct correlation between the expenditure of time, effort, and energy and the earning of money.

3. Encourage Budgeting

When your kids earn money, they need to be taught how to budget. Ideally, this means dividing every “commission” or birthday check into three categories: give, save, and spend. The percentages may look different depending on age and needs, but a good rule of thumb is to encourage 10 percent to go towards giving, 50 percent towards saving, and 40 percent towards spending.

4. Explain How Loans Work

While it’s good to teach kids to live within their means, there will eventually come a time when they’ll enter the real world and need to understand the role of loans and financing.

Teach kids there’s a time and place for getting quick loans – such as when you’re unable to pay a bill – but that they should be repaid as fast as possible so that interest charges don’t rack up.

5. Teach the Value in Investing

While saving is a great, kids also need to understand the value in investing so they can grow some of the money they’re saving. One great way to teach the value of investing is to play a mock stock market game.

“Choose 10 stocks of companies they are familiar with, like Apple, Disney or Nike. Everyone gets $100 (pretend) and chooses one of those stocks to invest it in,” financial planner Liz Frazier Peck writes. “For one month, check the stock prices each week and record how much money each person has. This can be a fun family dinner activity, and gives you a chance to explain investing. Make it a fun competition with a prize for whoever has the most money at the end.”

Adding It All Up

Teaching kids to be smart with money is a monumental task that requires patience, discipline, and repetition. While some kids will naturally be more prone to saving, others will have a penchant for impulse spending. Learning how to teach both categories of children will help you set your kids up for success.

The exact lessons you teach your kids may differ from the ones discussed in this article – and that’s okay. However, it’s your job to prepare them for the future – so do it.

Lisa B