By Denise Downey
Kids and Money
Despite all the money spent on education, it’s rare to receive much education on money. I speak with many people who openly admit, “nobody ever taught me this stuff.” Some figure it out along the way. Others struggle with money their entire lives. Either way, few parents educate their children on money.
It shouldn’t be that way. But many parents have no idea how to teach their kids how to earn, save, and spend money wisely.
Today we’ll cover a few tips to help start the conversation about money.
Talk Is Cheap But It Can Pay Off Big
Money shapes so much of our lives but often, talking about money is taboo.
Asking questions is the beginning of any intellectual journey.
- How do you earn money?
- Why do you spend money?
- When do you save money?
- Why do you donate money?
- What is the difference between needs and wants?
You don’t have to have answers to all these questions on the tip of your tongue. The point is to introduce money as a topic of conversation.
Address the Part Money Plays in Your Life
If you’re employed, then you receive a paycheck. Is it based on hours worked or a salary? You can share this information with your kids without divulging exactly how much you earn.
What do you do with your paycheck? Does it go into a bank account? Some kids may understand what a bank is, but many do not. And with the rise of online banking, the notion of banking can seem downright esoteric.
You can help them flesh that out by talking about how you interact with your bank. Your employer pays you, then you deposit some of the money into a checking account. Maybe some of it goes to a savings account. Maybe some ends up in a retirement account.
It’s worth your time to explain what a retirement account is and what retirement is. No joke, my kid thought his grandpa was retiring because he “got tired again,” i.e. he was re-tired–of course!
If you don’t explain this stuff to your kids, they will find creative ways to fill in the gaps in their knowledge.
Needs vs. Wants
When helping kids understand money, keep things simple. It’s a good idea to explain financial decisions within a simple needs vs. wants framework.
We all need food and we need a place to sleep. When it comes to toys, are those needs or wants? They might provide fun times but they’re not keeping us alive.
List some of the goods or services you’ve paid for recently and ask your child to classify each as a want or a need. It’s a simple exercise that will help your child evaluate financial decisions as they grow.
Once your child grasps wants vs. needs, you can talk about money flow. When money comes into the household, you want to prioritize needs over wants.
That provides a very simply chain of events.
- Mom and Dad work to earn money.
- The money earned goes to provide for needs first (shelter, food, clothing).
- Extra money is saved, spent on wants, or donated to charity.
You can point out that if the last two steps are reversed, you’re in for some trouble.
Include Kids in Light Financial Decisions
Invite your kids into the decision-making process.
Why did you choose camping over Hawaii? Why do you go to the library instead of the bookstore? There’s a financial component to these questions, and if you don’t cover it, you miss an opportunity to help improve your child’s decision-making skills.
The next time you hear the common “can I have __?” request, don’t just say no or yes.
Explain the why.
For example, “No, we are not going to buy that stuffed animal because we are saving our money to go to the pumpkin patch” or “Yes, we did a good job keeping our spending down last month, so we have enough money for that toy today.”
If they are old enough to be earning money, talk to them about the importance of saving a portion of every paycheck.
I recommend having them save 10% of their paycheck. Open an interest-bearing savings account for this money so they can see how money can work for them. Talk about a goal for that money. Is it a new bike, a video game, college, a car, or something else? Try to come up with a concrete goal.
As a bonus, getting them in the habit of saving 10% of their paychecks will get them used to saving in their 401k once they hit their 20’s and beyond.
Be the Bank
The best way to teach children how interest rates can help or hurt is to experience it first hand.
Some kids (and adults) have a hard time grasping the concept of interest as a percent. So turn it into $$$’s for them.
If your child wants a new toy, offer to lend them the money…with interest. Offer to lend them $20 today, but explain that they will have to pay you back $22 at the end of the month.
Or, better yet, offer them the opportunity to earn some interest in their money. For every $10 they save from their babysitting money, you give them an additional $1.
Being the bank is nice because you can offer more generous rates than most banks are currently offering.
More importantly, this allows to really emphasize the value of interest. It’s preferable for them to learn this from you now instead of from credit card bills later.
It’s not easy being a parent. It means being accountable for a whole other human being. If you are one of the many people who didn’t receive an education on money as a child, start talking to your kids today. You can ensure that they’ll be in a better position than you were when you began parenting.