There are multiple things that parents have to teach their children. It can be overwhelming because it spans all areas of life. However, financial lessons and how to manage money are still not often talked about between parents and children.
According to a survey conducted by The Penny Hoarder, a third of families that don’t talk about money management earn less than $50,000. However, for those that did talk about money, only 18% earn less than $50,000 a year. Around 40% of people who did not talk about money or finance growing up do not have any current savings. Children do not get to learn about money management in school either.
According to the Council for Economic Education, only 21 states require children to take personal finance classes to graduate high school. This means that parents are the people responsible for teaching children about money. Even if you aren’t the best with finances, you can still teach your children some things. Here are some tips so you can use them to create a strong financial foundation for your children.
1. Discuss family finances
Talking about family finances does not mean that you have to show your children financial spreadsheets. However, your kids aren’t going to be comfortable talking about money unless you are comfortable with it. If you have a family budget meeting every few months or every year, your family can talk about important topics. For example, how much money it takes to run a household and why it's important to save and have insurance. It is essential to let your children ask questions and give their input. This does not mean the financial decisions now lay in the hands of your kids. Instead, you can ask for their perspective on different things to save for and what's more important and why.
2. Teach them to understand the value of their money
If you get your children to value their money, you are giving them a head start on money management. Ensure they understand where their money is coming from if you give an allowance, or if they earn money themselves. Your kids will better understand the value of this money if they learn the concept of budgeting early in life. Children will learn how to make decisions that will prepare them for the future. Such as when they are figuring out how much of their paycheck will go towards food, savings, emergencies, etc. Ask them various questions such as it is worth it to do chores to earn an allowance? If you give them the power to make decisions, your kids will learn how to apply money concepts into decision-making as they grow.
3. Show them why saving is important
How your children save and what they prioritize saving for will change as your child grows older. However, teaching them the value of saving money instead of buying no impulse goes a long way. When teaching younger children to understand the concept, it is important to use real, physical cash and coins. This is so they get a clear picture of how things add up. It could be helpful to get different jars or piggy banks: one for spending, one for saving, and one for giving.
As they grow a little bit older, you can help them by opening a bank account. Many banks have specific accounts for minors that are linked to their parent's accounts. This can help your kids save on fees that are charged with regular accounts. Try bringing them to the physical bank location when opening your child's account. Doing so allows them to become comfortable dealing with financial tools and institutions. It is important that they do not see the bank or ATMs as intimidating or difficult to use. Additionally, savings accounts can teach kids about the importance of compound interest. They should learn to understand that money can grow in the account by earning interest on the interest.
If you don’t give your children the tools and knowledge to handle debt, they're more likely to get themselves into debt. The best way to avoid bad debt is to teach them how to responsibly handle it. You should educate them on the methods you use to avoid or get out of it. Make sure to inform them about good debt or bad debt. Lastly, teach them the difference between the interest rate and the value of what they are in debt for.
If you borrow money at a higher rate than you can earn by investing, that is very bad. The S&P 500 averages an annual rate of 7% which is the benchmark you should use on how much to expect back on investment. For instance, if your credit card charges 18% interest, you can’t expect that you will get these kinds of returns on investing--so that is bad debt. However, if you have a mortgage with a 3% interest rate, there is a good chance that you can invest this money and make more in interest. It is essential that you teach kids that good debt and bad debt involves these things and how things such as borrowing money to buy a candy bar are bad debt, but borrowing money to invest in a shovel so you can earn money by shoveling snow is good debt.
Additionally, make sure you talk about student loans early with your children and how student loan debt can affect their life after college. Ask them to consider the costs and benefits of this debt and if private education is worth more to them than public education. It is also important to teach your kids how to responsibly use debit and credit lines by adding them as an authorized user. Lastly, you can introduce your youngest kids to financial lessons with debt-free charts. First, decide on a bigger purchase that your child wants, but doesn’t have enough money for yet--but is small enough that they can pay the amount off in a few months or weeks. Each time a payment is made to you, they can color in sections of the chart. They will then have a better understanding of what it means to pay off debt with this visual piece.
5. Invest early
Your children do not have to be rich to learn about investing. They also don’t need to be rich to start investing. No matter how old they are, children can learn about growing their money by investing a certain amount of their money. It is recommended that each child starts with a small amount as there is a risk that the investment can lose value.
It might be one of the toughest financial lessons for your child to understand, but it is much better that your child learns these financial lessons and loses a week of allowance instead of all of their savings. Investing also doesn’t require a lot of money to start. If you work with a brokerage that allows you to open a custodial account and invest in fractional shares, your kids can pick some companies and check the stock price each week to see how their investment is doing.
These financial lessons are important to teach your children from a young age so they are best set up for financial success as they grow older. If you are afraid that you are not an expert--don’t worry--with a little bit of research and some time, your children will learn more than you realize.