5 things to teach your kids about money management
- Posted by Marianne Stenger |
- Thursday 28 June 2018, 10:36 AM (EST)
Financial literacy is a vital life skill, and when kids are supported in developing solid financial skills from a young age, they will be better prepared for the financial challenges they’ll face in adulthood.
A study published in the Journal of Consumer Affairs showed that children are developmentally capable of saving by age five or six. Another study authored by behaviour experts at Cambridge University found that by the age of seven, most children are able to recognise the value of money and are capable of complex functions like planning ahead and delaying decisions.
Unfortunately, many parents don’t feel knowledgeable enough about money management to teach these skills to their kids. A survey by financial firm M&G found that one in six parents want to teach their kids financial literacy but don’t feel confident doing so.
The Cambridge University study, however, found that children are influenced by the financial skills and approaches that are modelled, discussed and demonstrated by their parents. So as a parent, it’s important to not only model good financial habits, but also make an effort to discuss and explain financial concepts early on.
Since teaching children to spend and save responsibly starts with helping them understand a few basic concepts, here are five things to teach your kids about money management.
1. Money is a limited resource
Once kids understand that money is a limited resource and that money mistakes have repercussions, you can introduce them to the concepts of budgeting and saving.
One of the best ways to help children acquire a taste for financial planning is to give them a monthly allowance or let them earn their own pocket money by completing small chores around the house.
Giving them access to money will help them understand its value and think more critically about it. For example, children who spend all their money on one toy at the beginning of the month will quickly learn that they can’t buy anything else until they receive their allowance the following month.
2. Wants versus needs
Research shows that although receiving an allowance can help build children’s financial skills, the real benefits are only seen when they are also given guidance on their spending and budgeting.
Start by explaining that “wants” are things we would like to have, like the latest smartphone or video game, whereas “needs” are things we need to survive, like a house and food. Of course, it’s not always easy for children to see the difference between that new toy they think they need and the clothes they actually need to go to school or the gas and electricity that keeps their homes running.
The best way to help your child understand this concept is to put it into story form and ask hypothetical questions about the consequences certain financial decisions might have.
Keep in mind that there’s a grey area too, because although we all need clothes and most of us drive cars and use smartphones, we don’t necessarily need the most expensive clothes, fanciest cars or latest smartphones. So try to bring this up and ask questions when you’re out shopping, looking through magazines or watching TV together.
3. Delayed gratification
Even many adults struggle with delaying gratification, which is why so many of us end up in a debt cycle.
To teach this skill, you can explain that you will pay for the things your child really needs, such as food, clothing and transportation. However, if there is something they want but don’t really need, such as a new toy or video game, they must use their allowance to pay for it. If they don’t have enough money for it, they will have to wait while they save up for it.
When your child asks you for something in the store, you can remind them that they’re welcome to buy it with their own money. You might be surprised how quickly they decide something isn’t worth it when they have to spend their own limited resources on it.
Once you’ve had the discussion about “wants” and “needs” and your kids are receiving a weekly or monthly allowance, they are ready to learn about budgeting.
One way to teach the concept of budgeting is to create a simple pie chart that shows how much of the monthly income goes to living expenses, how much goes into savings and how much is left for leisure activities or fun extras.
It doesn’t have to be precise, as long as it demonstrates that there is a limited amount of money to cover all the monthly expenses, which means that spending choices must be made.
5. Credit and debt
Although credit and debt are decidedly adult topics, it's possible to simplify them to set kids up to make good financial decisions and avoid getting caught in a cycle of debt later in life.
The most important thing they should understand is that credit allows them to borrow money to buy something now and pay for it later. Emphasise that it can be a valuable tool, but also comes at a cost. Again, try to explain this with the help of relevant examples or stories they can relate to.
If you’re looking for resources that will help you talk to your kids about some of these important financial concepts, check out this list of books recommended by children’s book editors and parents.