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Teaching kids about money is one of the toughest yet most important lessons you can give your child. Unfortunately, personal finance is one of those topics they don't touch upon enough in school, leaving it up to parents to teach good money habits to their children.
The good news is that it's easy to give kids a good financial education starting at a young age.
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Why Is It Good to Teach Kids About Money?
Your kids will grow up one day and need to make decisions about managing money, earning money, and spending money. They need to know how to build wealth, save an emergency fund, and how to get started investing.
They could learn some of this stuff on their own, but they could make a lot of mistakes along the way. Why risk it? Instead, you can teach kids from an early age all the way through college students the importance of financial literacy and sound financial decisions.
Teaching Kids About Money: 10 Ways
Start Talking About How to Manage Money Early
As soon as your kids can count and listen to you talk, you should introduce the idea that money matters. You can teach even preschool-aged kids important financial lessons, from playing store with fake money to setting up a clear jar to collect loose change. Let them get used to handling money, including physical cash, so it's a natural part of their life.
Pay for Household Chores
Even if you didn't receive an allowance growing up, think of it as a real-life way to teach kids about money. Not only will kids learn how to earn money when they make an allowance, but you can teach important concepts like delayed gratification (saving for what they want), giving a percentage of their income to charity, and putting some money aside for 'fun.'
Teach the Difference Between Wants and Needs
Young kids, especially, have difficulty differentiating between wants and needs. Everything they see, they think they 'need' when it's often just a want. It can be a difficult topic to grasp, so it's best to show your child what it looks like in real life. For example, when you buy a gallon of milk, that's a need. But when your child wants a toy, that's a want. Making kids understand this topic can be tricky, so use it often.
Let Kids See You Giving
A big part of teaching kids about money is teaching them to give. Remember, kids see what we do much more than what they hear us say. So when you're talking about how money works and modeling good financial behavior, let kids see you giving to charities and doing good for others.
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Let Kids See the Opportunity Cost of Your Financial Decisions
You make personal finance decisions every day, but how many do you let your kids see? If you want to teach them about money management, they need to see you in action. Start with small decisions, such as when you're in the grocery store and are choosing between two brands or choosing one type of meat over another.
As your kids hit middle school and older, you can show them other opportunity costs, such as if you buy a car, you have to cut back on certain monthly costs. Let them see the big decisions that go into organizing your family finances.
Talk About Your Job
No matter what age group your child is in, talk about your job and let them know this is where the money you spend comes from. Let them see what you do, talk about how often you get paid, and what you do with the money. Do you put it in your checking account, savings account, or somewhere else? If you make deposits at the bank, let your child see you doing it, and depending on their age, let them help.
Open a Savings Account and Teach About Compound Interest
The best way to teach kids about money is to let them see the concepts firsthand. As soon as your child understands the concept of going to the bank, open a savings account for them. When your child receives money, such as for presents or allowance, help them put some of the money in their bank account.
Next, monitor the account monthly. Let your child see the money grow. Watching their money grow will make saving money more enticing.
Practice What You Preach
If you want to teach your kids financial literacy, you must model it yourself. They are watching every move you make. If you say one thing but do another, you can bet they watch what you do more than listen to what you say.
For example, if you talk about saving money but instead you over spend money, your kids will see you spending and think it's okay to do the same. When you mention not using credit cards for big purchases, for example, don't charge it and think they're not watching.
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Teach Budgets at Any Early Age
Many adults fear budgeting because it was never introduced to them until later in life. At that point, it's not natural, and it feels more like sacrifice than helping your financial situation. As soon as your child understands basic math, introduce budgeting and how to handle money, even if you're only talking about your child's $5 weekly allowance.
Teach Even the Tough Financial Topics
As your child gets older, teach kids about even the toughest topics, such as dealing with bad money habits, a poor credit history, and mismanaging your bank accounts. Be honest with your kids about financial mistakes you've made in life and how you wish you had someone teach you the basic economic concepts and financial strategies you are sharing with your child.
Example Money Lessons & Activities by Age
Teaching kids about money from an early age is important. You can start as young as preschool or as soon as your child can talk, count, and understand basic concepts.
Here are some great ways to teach younger and older children about money.
Let Your Preschooler Pay For Your Purchases
Steer clear of credit cards or even debit cards when your kids are young. If all they see is you paying with plastic, they will think that's how it's done. Instead, have the cash available for your purchases and let your child hand the money to the cashier. They'll learn early about the concept of trading money for items.
Teach Elementary School Kids About Opportunity Cost
As kids get older, you can talk to them about the opportunity cost of financial decisions. For example, if there are two items your child wants to spend their money on, show your child how choosing item A means you can't get item B, or vice versa.
This is also a great time to teach comparison shopping. If your child is trying to make their dollar stretch, you can model how to shop around and show how saving money on a purchase leaves more money for other things.
Teach How to Avoid Impulse Buys
When you teach kids about money, you mustn't give in to impulse buys. No matter how cute the outfit is or how much your child wants an item everyone else has don't give in.
Instead, use this as an opportunity to teach about how to save money for something you want. This will also help your child understand the opportunity cost of giving up other things to buy the item they suddenly want.
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Give Older Kids Their Own Bank Account
It's never too early to open a bank account for your child. However, as your child enters the later elementary school years, you can let your child maintain the account. Whether your child has a summer job walking dogs or babysitting, or they just have money from their allowance or gifts, giving your child control over the account teaches responsibility, lets them learn how to make financial decisions, and enforces the idea to save money.
Help Pre-teens and Teens Learn How to Make Money
Earning money is one of the key factors in managing money. Sure, your child can have a piggy bank with coins and a few dollars from chores or gifts from grandparents, but earning money for a living enforces the concepts of financial literacy. When your child has their own money to manage, the decisions become a lot more serious for them.
Keep Driving Home Contentment
Kids of all ages are prone to impulse buys or wanting to keep up with everyone else. Take smartphones, for example. Your child could have a perfectly good phone, but when the latest model comes out, and 'everyone' has it, they may beg for it.
Don't give in. Instead, teach your child about contentment and how achieving financial success only comes from making tough decisions that may not have them 'keeping up with the Joneses.'
Teaching Kids About Money Is the Best Lesson You’ll Teach
It can feel hard to teach your kid tough money lessons, but it's one thing your child will take with them into adulthood. Start early in your child's life and show them how to manage money. You'll have hiccups throughout your journey, and that's okay. Be honest with your child, help them made sound financial choices, and always be a good example.