Money is an important part of our lives, yet many of us struggle with managing it effectively. That’s why it’s crucial to start teaching your children about money management from a young age. For most people, your first encounter with money happens when you receive your first allowance or find a coin on the ground.
For children, money can seem like a magical object that can buy anything they want, but it’s our responsibility as parents and caregivers to teach them how to use it wisely. In this article, we’ll explore some practical tips for teaching children how to save money and make smart financial decisions that will benefit them for a lifetime.
Start Early by Making Allowances
Giving children allowances is a good way to begin teaching them how to save money and budget for the things they want. By giving them a sense of ownership over their money, children can learn to take responsibility for their financial decisions and develop a positive relationship with money from a young age.
Some parents allow children to earn their allowance by doing household chores, while others expect their kids to handle the basic duties and contribute to the home without compensation. A compromise might be to give children clear guidelines on the expectations of which chores are necessary, coupled with opportunities to earn extra money by doing chores that fall outside their normal household responsibilities.
When it comes to giving children allowances:
- Set parameters. Discuss what they may use the money for and encourage how much should be saved.
- Make allowance day a routine, like a payday. Give the same amount on the same day each week.
Suggestion: Consider “raises” for children who manage their money well.
Take Them to the Bank
While piggy banks are an excellent tool for teaching young children about saving money, opening a savings account at a traditional bank can offer additional benefits by introducing concepts such as earning interest and the power of compounding.
Although children may be tempted to spend all of their allowance right away, it’s important to encourage them to divide it up, allocating some for immediate spending and setting aside some for longer-term goals. By writing down each goal and the corresponding weekly savings target, children can learn to distinguish between short-term and long-term financial objectives. This approach can help them develop healthy saving habits and gain a deeper understanding of the value of delayed gratification.
Suggestion: As an incentive, you might want to offer to match whatever they save toward their long-term goals.
Take Them Shopping
Social media pressures and online personas can tempt children to spend money, but they need guidance when it comes to making good buying decisions. Teach children how to compare items by price and quality. When you’re at the grocery store, for example, explain why you might buy a generic cereal instead of a name brand. When shopping online, teach them how to compare different stores, quantities, and discounts.
Earning and Handling Income
Older children (especially teenagers) may earn income from part-time jobs after school or on weekends. Earned income from part-time jobs might be subject to withholdings for FICA and federal and/or state income taxes. Show your children how this amount comes out of their paychecks and reduces the amount they have left over for their own use. Then, help them create a budget.
Creating a Balanced Budget
To develop a balanced budget, first list all their income. Next, list routine expenses, such as pizza with friends, money for movies, and gas for the car. Finally, subtract the expenses from the income. If they’re in the black, you can encourage further saving or begin a conversation about charitable giving. If the results show that your children will be in the red, however, you’ll need to collaborate with them on a plan to address the shortfall.
Suggestion: To help children learn about budgeting:
- Devise a system for keeping track of what’s spent.
- Categorize expenses as needs (unavoidable) and wants (can be cut).
- Suggest ways to increase income and/or reduce expenses.
The Future is Now
Teenagers should be ready to focus on saving for larger goals (e.g., a new computer or a car) and longer-term goals (e.g., college spending, an apartment). And while bank accounts may still be the primary savings vehicle for them, you might also want to consider introducing your teenagers to the principles of investing.
To do this, open investment accounts for them, (if they’re minors, these must be custodial accounts.) Look for accounts that can be opened with low initial contributions at institutions that supply educational materials about basic investment terms and concepts. Your financial advisor can help with this setup.
Helping older children learn about topics such as risk tolerance, time horizons, market volatility, and asset diversification may predispose them to take charge of their financial future.
Should You Give Your Child Credit?
If older children (especially those about to go off to college) are responsible, you may be thinking about getting them a credit card. However, credit card companies cannot issue cards to anyone under 21 unless they can show proof that they can repay the debt themselves, or unless an adult cosigns the credit card agreement. If you decide to cosign, keep in mind that you’re taking on legal liability for the debt, and the debt will appear on your credit report.
- Set limits on the card’s use. Ask the credit card company for a low credit limit (e.g., $300) or a secured card to help children learn to manage credit without getting into serious debt.
- Make sure children understand the grace period, fee structure, and how interest accrues on the unpaid balance.
- Agree on how the bill will be paid, and what will happen if the bill goes unpaid.
- Make sure children understand how long it takes to pay off a credit card balance if they only make minimum payments.
If putting a credit card in your child’s hands is a scary thought, you may want to start off with a prepaid spending card. The card can be loaded with a predetermined amount that you specify and generally may be used anywhere credit cards are accepted. Purchases are deducted from the card’s balance, and you can transfer more money to the card’s balance whenever necessary. Although there may be some fees associated with the card, no debt or interest charges accrue; children can only spend what’s loaded onto the card.
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