Teaching Your Kids the Basics of Finances
Learning how to handle, where to invest, and what not to do with money are skills everyone needs to be successful in life. The earlier kids are introduced to smart money-management practices, the better prepared they’ll be to handle their finances when they leave the nest. Teaching your kids how to protect their money is a lesson with unlimited value.
A penny saved
When kids get money for a birthday or Christmas present, their imaginations take over as they picture everything they will buy at the store. Now is your chance to step in and teach a valuable lesson about saving.
“Label three mason jars as Save, Share and Spend,” advises Forbes Contributor Liz Frazier Peck. “Divide any money your child receives through allowance and gifts into these three jars. I recommend putting 10 percent in the Share jar with each deposit. Split the rest between the other two based on their goals. Help them decide what to buy with the Save jar proceeds, and track how much they have and how much they need. This will be their first budget.”
A penny earned
Earning your own money fosters a strong sense of independence, so in order to raise financially independent kids, you need to encourage their big (or little) business dreams.
“Starting businesses can get kids of all ages more comfortable with money,” explains NerdWallet.com Writer Heather Castle. “Younger kids can open lemonade stands; older kids can branch out into areas they enjoy. For example, a kid who likes to draw or paint could open a card-making business. A kid with a green thumb could start a flower or vegetable garden. Help them determine how much to charge for their goods by calculating the costs of production and adding a premium for their time.”
Once they have their hard-earned money in hand, Frazier Peck advises taking them to a bank, where you can assist them in setting up their own accounts.
A penny spent
Spending money is the ultimate reward for hard work, but it can also lead to some major financial pitfalls. If you have teens, you need to explain the benefits and dangers of credit cards, especially since credit applications will be making their way to your college-bound kid.
“Give older kids a lesson on credit scores. Explain that behaviors such as paying bills on time increase your score, while paying bills late or missing payments can lower it,” advises Castle. “You can also describe how having bad credit can make it harder for you to borrow money to pay for a car, school or a house, or even to rent an apartment—and make it more expensive to borrow when you are approved.”
Introducing your kids to the stock market as a family game is a smart way to teach your kids about investing.
“Choose 10 stocks of companies they are familiar with, like Apple, Disney or Nike. Everyone gets $100 (pretend) and chooses one of those stocks to invest it in. For one month, check the stock prices each week and record how much money each person has. This can be a fun family dinner activity, and gives you a chance to explain investing,” suggests Frazier Peck.
Teaching your kids about the basics of finances—earning, saving, spending and investing—at a young age and throughout their formative years will teach them to make smart money decisions as young adults and beyond.