9 MIN READ
The key to not raising spoiled children is raising children with good money habits. It's not something our society readily promotes, but it's one of the most important skills you can teach your child.
It is essential to learn how much things cost, how to manage a savings and checking account, and when it's okay to use debit and credit cards to have a solid financial foundation.
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Importance of Raising Children With Good Money Habits
In today's 'instant gratification' society, it's more important than ever to teach good money habits to children.
Most children are heavily influenced by social media, seeing advertisements for 'buy now, pay later' and crypto investments as a few examples.
Money management is a key factor in adulthood, no matter what your child decides to do later in life. Understanding delayed gratification and knowing how to spend, save, borrow, and manage credit is essential to thriving as an adult.
The Role of Financial Literacy
Financial literacy isn't something most schools teach your kids. If they do, it's typically a quick lesson or two in high school, when kids can learn financial literacy much sooner.
According to a University of Cambridge study, kids form many habits by age seven. During the first four to five years of life, their brains establish fundamental processes necessary for good personal financial management.
By the time they are middle schoolers, they should have a solid understanding of money.
You might feel weird teaching your kids at a young age about money, especially complicated topics like saving or spending and how to use a credit card responsibly, but there are long-term benefits, including:
- Makes money conversations feel normal versus awkward or challenging
- Helps kids make sound financial decisions
- Let kids learn from your money mistakes
- Teaches the importance of compound interest
- Provides a hands-on approach to building a solid financial foundation
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Tips and Strategies for Raising Kids With Good Money Habits
Raising children with good money habits can seem overwhelming with all the other important life skills you must teach your kids, but money habits are vital.
Check out these tips to teach kids good money habits and provide a solid financial education.
Start at an Early Age
You can start teaching young children about money as soon as they can talk. It might feel strange at first, but talking to your kids about money in real life normalizes personal finance.
Talk to your kids about money in the grocery store, and discuss your purchase decisions. Let kids help you pay with cash, and talk to them when you're paying the bills.
The key is not to make money a secret or like it's something to fear. As your child ages, you can include them in more complex financial decisions and help them manage their own spending so they reach their savings goals.
The more kids see you manage money and make important money decisions, the easier it will be for them as adults.
Lead by Example
Letting kids see how you handle money is the key to their solid financial literacy. Show the difficult decision not to purchase something because you have to pay the bills or don't have enough money saved.
Let them see you using money in real life and then give them opportunities to earn money and make the same decisions on a smaller scale.
For example, if your 8-year-old has household chores and earns an allowance, you can help him learn how to save and spend money. Let him understand the opportunity cost he incurs if he chooses to buy things versus save for a future goal.
Normalize Talking About Money
Make talking about money as normal as possible because making it seem like a secret makes it bad. Children learn by watching you more than listening, so ensure that you keep a positive spin on money and the conversations you have about it.
Suppose the finances are stressful, and you must have an uncomfortable conversation with your spouse or another adult. Do it outside of younger kids' earshot so they don't assume you should only talk about money behind closed doors.
Use Real-Life Situations
Even younger children can be involved in real-life situations with money. Let your child help you make deposits at the bank, pay at the grocery store, or save money in their piggy bank.
Kids learn better by doing rather than listening. This doesn't mean they don't listen because they do when you least expect it. However, letting them practice good financial habits themselves or mimic you will help them learn more about money habits than any other method.
Give Children an Allowance
A study in the Journal of Economic Psychology studied a group of children, some of whom earned money via an allowance and others who did not. Both groups were given $4, either cash or credit and an experimental store to spend it.
The children who received an allowance made smarter money decisions, seemed better at math, and understood the opportunity cost of different buying decisions.
Even if you don't believe in paying kids to do household chores, find something they can do that you are comfortable paying them for so they can learn good money habits.
Discuss Needs vs. Wants
Helping kids learn how needs and wants are different early in life is important. They can differentiate between more important things when they are older and potentially avoid excessive credit card debt.
Needs are something kids need to survive. You can start teaching this to kids, even in a young age group. Do this by playing store at home and talking about things needed for survival vs. things that would be nice but unnecessary.
As kids age, include them in your decisions between purchases of needs and wants, and show them the process you use to choose the proper timing for purchase decisions.
Teaching Budgeting Skills
If you don't like budgeting, chances are you won't like teaching it to your children either, but children must understand what a budget is and how it works.
You can start by teaching the spend, save, give theory at a young age. When kids earn an allowance or receive money as a gift, help them learn how to divide the money into three jars, one each for spending, saving, and giving.
This provides a visual so they can see the money split up and understand its importance.
As kids age, you can help them create a budget even if they don't have bills. Teach kids to set short and long-term goals, determining how much they must save monthly to reach their goal by the desired timeline.
You can also pass along small expenses to your child, helping them learn how to budget for it. For example, if your child wants a new pet, give them a dollar amount they must contribute toward it, and help your child budget to reach the goal.
The more you normalize budgeting now, the easier it is for them to implement it when they become adults.
Setting up a Savings Account
Putting money in a savings account is a great opportunity to instill savings habits. Let kids deposit money at the bank and help them track their earnings by downloading the bank's app.
Many banks have savings accounts for kids with kid-friendly apps to help kids start saving.
Allowing Them To Learn From Mistakes
Don't jump in and help kids avoid mistakes; this is how they learn! They can learn from their own money mistakes, as well as yours. Don't hide the mistakes you've made.
Instead, show kids what you did, how you're fixing the issue, and what you'd do differently next time, and help them learn how to work through their mistakes.
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Challenges Parents Encounter in Teaching Money Habits
All the tips for raising children with good money habits make teaching money management easier, but that doesn't mean it's without challenges. Some common challenges include:
- Finances aren't always easy for adults to manage, but you have to put on a happy face and make budgeting, saving money, and paying bills a fun habit
- Social media and peer pressure can give kids other ideas about money than what you teach, forcing you to 'undo' what they learn to avoid bad money management
- Some kids don't have any interest in learning about money management because of the complex concepts, so you must keep it age-appropriate to keep them engaged
How Can I Encourage My Child To Save Money?
The best way to encourage your child to save money is to lead by example. Show your child how much and where you save money, and encourage them to try. You can also make a game out of it, challenging your child to a 'savings game' to see who can save the most.
At What Age Should I Start Teaching My Child About Money?
As soon as you feel your child understands what you say, teach your kids about money. Play store with pretend money, talk about purchases at the grocery store, and even help kids save spare change in jars so they can see their money management in action.
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What’s the Best Way To Introduce the Concept of Saving to a Child?
Help your child learn about saving money using a piggy bank. Find one your child loves and encourage them to fill it up with coins and dollars they have from allowance or gifts.
When the piggy bank is full, help your child divide the funds between savings goals and spending so they can understand the importance of not spending everything they have.
What Is the Most Effective Way for Parents To Teach Their Children About Money?
Each child learns differently. The key is to teach kids age-appropriate lessons, making them more complex as they age. For example, it is key to start with play money and move to the real thing when they are old enough to understand.
Even if you weren't raised with an allowance, it can be one of the best ways to teach kids about money. Giving kids a hands-on method to learn how to manage money will make it more natural for them to handle much larger amounts of money when they become adults.
The Bottom Line
Teaching kids good money habits is a critical part of your parenting responsibilities.
Letting kids see that money can positively impact their lives when appropriately handled can make raising children with good money habits much easier.