Giving kids an education about money is an awesome responsibility. The epidemic of foreclosures and bankruptcies in the midst of the credit crisis demonstrated how easy it is, even for smart adults, to make fatefully bad decisions with money. Without good guidance, how can kids do much better?
Fortunately, teaching your kids financial literacy isn't all that difficult. It involves passing on skills you use every day. Begin with small steps when kids are little and grow these themes as they age. You needn't be an expert. What matters is teaching three fundamentals: restraint, saving, and budgeting.
Smart financial decisions are made by kids who:
- truly get it that, despite what TV ads and their hearts say, they can't have everything they want
- can distinguish between what they need and what they want
- are experienced in choosing what to relinquish or forgo in order to later get something they really want.
How do you teach this stuff? Like it or not, the lessons that stick are the ones our kids pick up from watching us. Kids are avid spies and mimics of their parents. Your toughest job may be getting your own financial life in order. If you can't stop spending or yield against your better judgment to begging kids at the store, you're teaching powerful (but negative) lessons about savings and money.
Some ideas to teach restraint:
- Let children watch you make buying decisions aloud, weighing your desires against your needs, considering consequences of each possibility. Ask what they'd do if they had the choice.
- Keep a running conversation with children about what's important to them. Ask open-ended questions to help them articulate their thoughts.
Saving is a concrete way that kids can see how practicing restraint now means being able to choose what they want later. Your job is to find a zillion ways to practice saving, whether it's helping a youngster save Halloween candy to enjoy for days or working together to compare online savings account rates to teach the concept of earning interest.
Some ideas to teach saving:
- Let children see you put money in a savings account regularly. Explain to them the different kinds of basic deposit accounts, including certificates of deposit, high-interest savings accounts, and money market accounts.
- Explain, using an online interest calculator, how interest rates translate into more money through banking. Have them sit with you while you shop for a better savings account rate.
- Teaching savings habits can extend beyond money. Aside from setting up savings accounts, you can let them earn and "bank" points for privileges--staying up late for little kids, for example, or letting older children borrow the family car.
- Set some long-term savings goals (a fun trip, a game, or a piece of sports equipment) and make reaching them it a family project.
Budgeting teaches older children how to get more sophisticated with saving. A budget is a tool that gives kids control over several pots of money at once--saving some, spending some, and making plans for all of it.
Some parents like to use allowances to help children experiment with a variety of skills, including saving, investing, planning, identifying priorities, setting goals, and budgeting.
Do appreciate that children's approach to budgets and money will be as varied as their personalities. Some take to it with a vengeance, loving the planning, imagining, and delayed gratification. They may even have trouble letting go and enjoying the occasional splurge throughout their lives. Other kids struggle with budgets and reining in their impulses. Managing impulsiveness may be their life's work, something you'll be gently helping them with for a long time.
Part of your challenge is to experiment with when to let them follow their impulses and suffer the consequences and when to jump in and give guidance.
Some ideas to teach budgeting:
- Help each child identify two to four categories (or "buckets") for their money. Some examples: "long-term savings," "short-term savings," "charity," and "fun."
- Consider letting children watch and help as you work out your own household budget. Let them help pay bills through online banking.
- Make a simple budget for a grocery shopping trip. Categories could include staple foods, optional foods, and junk food.
- Help kids decide how to separate money saved for each category. Some people like putting cash in envelopes marked for each bucket. Others put it in a checking account and keep track on paper, a ledger or a spread sheet, and still others set up online savings accounts designated for different goals.
- Ask questions that help children discover the tradeoffs involved between different budget categories.
- Help children think in terms of budgeting many types of things, not just money. For instance, young children can budget their free time: should they spend it with this friend or that one? Doing this activity or another fun thing? Older kids can create and maintain a monetary budget if they can't figure out where their money's going--or to justify a request for an increase in an allowance.
By keeping your home-grown curriculum simple--and just as importantly, by demonstrating your lessons over and over again--you can ensure that your kids bring the right money management principles and practices with them as they enter adulthood.