You want your kid(s) to be skilled at managing their own money in the future—but how should you begin teaching them about financial responsibility?
A University of Cambridge study showed that kids form their money habit by as early as seven years old, and that their observant eyeballs are usually watching when their parents make monetary transactions. With a little bit of deliberate involvement, you can give your kids a financial head start.
"Children develop financial and economic understanding when they have 'personal economic experiences.' For example, sources and amounts of money that children control influence their learning. Although young children under the age of seven years are unlikely to develop sophisticated understanding or conceptions about the processes underpinning such practices, they do develop a limited understanding relating to why they are done, and how they are effective."
Start by helping kids observe and calculate the exchange of money from an early age and by asking for their opinion when you're getting ready to make a purchase—big or small.
Guide to Early Financial Education
From introducing the concept of money to making their first investment, here's a roadmap to guide you through the process of your kid's financial education.
Introduce the Concept of Money
Introduce young kids to coins first. Teach them the value of coins and encourage them to save their coins in a piggy bank. Use a clear piggy bank or jar so that kids can actually see their pile of money grow.
Lead by Example
Explain what you're doing when you write and deposit a check, use an ATM card, or pay for groceries. Avoid actions such as making an impulse buy, and tell the kids you're going to wait one day instead and see if you really want to make the purchase. Kids are very observant and will learn many of their money concepts by watching you and copying your behavior.
Open a Savings Account
Use an Allowance
More than 4 in 5 Americans believe kids should receive an allowance, most commonly saying every cent should be earned and linked to chores (52%). While a quarter (27%) believe it should be partially earned and partially gifted. Whatever you decide, when kids receive an allowance they must learn very basic budgeting and rationing skills. As they manage their allowance money, their money management skills will improve.
Make Learning Fun
Allow Them to Make Mistakes
Let your kids make their own spending decisions, even if it means making mistakes and wasting their money. It's a valuable teaching tool. However, be ready to step in and help guide them when they need it.
Let Them Earn Money
Working summer jobs, becoming lemonade-stand entrepreneurs, or working for mom and dad will all help kids learn about business and hard work. If you pay an allowance, call the money a commission instead, and allow kids to earn various commissions for different household chores.
Create a Budget Together
Allow your kids to plan for a family event to practice their budgeting skills. Help them also understand the opportunity cost of spending money on one thing, that may keep them from having enough money for other things.
Teach Your Teen About Credit
Help your teenager understand the concept of delayed gratification and the pros and cons of buying on credit.
Kids will often be surprised by the withholding on their first paycheck. Explain the concept of taxes early on and their paycheck will meet their expectations.
Encourage Charitable Giving
As Mary Gordon writes in her paper, The Roots of Empathy, "Teaching children emotional literacy and developing their capacity to take the perspective of others are key steps towards collaboration and civility; they are indispensable steps towards preventing aggressive and bullying behaviors." If you introduce compassion and philanthropy to your kids early, they will likely become eager volunteers and kind people as they grow.
Introduce Long-Term Planning
Teach your kids about long-term savings and debt. Discuss the costs of college, cars, houses, and retirement early to give them a head start.
Teach About Investing
Once they've mastered basic banking skills, encourage your kids to learn about the complexity of globalized markets. Explore the idea of stocks, mutual funds, or savings accounts.
Teach Kids to Set Goals
Many successful financial milestones are achieved by goal-setting. Encourage your kids to set savings goals and work towards them.
Kids will follow your lead. If you complain and stress about money in front of them, they will internalize this and have their own issues with money when they get older. Remember that kids are constantly observing adult behavior and building their habits and worldview around your actions.