As a parent, you have the responsibility to teach your children about money management-the good, the bad, the ugly. By teaching them to form good money habits when they are young, you will set them up for success later on. It doesn’t matter how young your children are, you can always find a way to sneak in a money lesson into your daily life that they can comprehend. Below are 3 main strategies that can help you children understand the importance of money and the impact finances have on their lives.
Although many adults struggle with money management, most of us recognize the importance of taking care of our primary bills and survival needs first such as rent and food. The fun/wants comes second, and only if we can afford it. Children aren’t born financially literate; they must be taught. Introduce the concept of budgeting to them by talking about the differences between needs and wants. Having a food to eat is a basic need, but candy is just something we want. The grocery store can be a good place to reinforce this concept. While you shop with your children, ask them whether each item that you put into the cart is a need or a want.
It’s difficult to explain money management to children if we were to buy them everything. When everything is provided to them, it makes sense that children can develop the misconception that money is always going to be available. If you want your children to make smart financial decisions later in life, you should start instilling financial literacy in them now. Don’t be afraid to tell your children no when you can’t buy something. Give your children a specific amount of money and give them a choice of two things to buy from. They must choose one purchase at the expense of the other. This concept is often a great teaching moment for children who are already getting an allowance and who understand how money works.
Children need to understand that money has to be earned. Helping them understand the concept of “working for money” is also teaching them work ethic. Instead of simply giving your children an allowance each week, consider giving them a list of chores that must be done, and base their allowance off of how much they accomplish. Making the bed and putting toys away will become much more fun for them as there will be a prize at the end. They will be responsible for spending or saving the money they earn during the week. Remember to be patient—teaching your children financial literacy is a marathon, not a sprint. Finances are complex, especially when you get into retirement funds, investments, and taxes. While you don’t need to discuss these topics with your little children just yet, you should introduce these topics when they get older. It’s important to prepare your teenage and adult children for “the real world” by giving them a primer on complex financial topics.
Read more tips that will help on your journey to teaching your children financial literacy:
Children observe everything that we do, and they learn from our behavior and habits. Be smart with your money and pay your bills responsibly. Tell them about how you have been saving up for something. If they see you making frequent impulse purchases or living beyond your means, they are more likely to replicate that behavior.
Being in control is the best way to learn. Observe how they handle their allowance and talk about it. Help them open a savings account. Explain what a budget is and create one together.
Mistakes are part of the journey, but they reinforce the lesson you are trying to teach them. Give them a space to experience buyer’s remorse. It’s important for you not to step in and give them more money or offer alternatives. They will think twice about their next purchase.
Help them understand the bigger picture. They should have a vision of what they want to use the money for in the future and how much they need to save to accomplish that goal. Introduce piggy bank for smaller children, preferably a see-through one, so they can see the money adding up. Help them set realistic goals at all ages, e.g., saving for a new video game, or saving up to buy a used car. Setting a clear goal is a great motivation instead of saving up for nothing specific.
On the first look they might look the same, but they are not the same thing. Explain that debit card behaves like cash, and you can only spend what is in your account. With credit card, they can delay payment but be charged interest later, which can make a purchase more costly.
When your child is still a minor, you can open a custodial IRA on their behalf; as soon as they earn income (as reported on a tax return), they can begin depositing money into the account. The good thing about custodial IRA account is that its assets are not included on the FAFSA when applying for college financial aid. Your child will automatically own the account when they turn certain age (usually 18 or 21 years old).
Set your children up for success by explaining to them how finances work early on and continuously throughout their youth. Only 6 states in the whole America require that high school students take a standalone personal finance course before graduating. This leaves a substantial gap in the financial know-how of young people.
Navy Mutual is a great source of financial knowledge. Their mission is to educate members, military, and uniformed service community at large on matters of financial security. They have calculators available on the website that can help you determine how much you need to save up for college or retirement. Navy Mutual also provides life insurance and annuities to military families. For more information about Navy Mutual and their services, call 800-628-6011.
A similar version of this article was originally published on Navy Mutual’s Website: Children’s Financial Literacy
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