Children can begin learning money management skills almost as soon as they walk. Schools are great for teaching your children about science and math, but they fall considerably behind when it comes to teaching real-world financial knowledge.
Many young adults in the US today lack sufficient knowledge about saving and budgeting. This has given a rise to a whole generation of Americans living paycheck-to-paycheck. Money management is a skill best taught at home, and it takes some patience and effort from parents to ensure their children know the value of money and the art of wealth building.
Use the following money milestones and suggested activities to help your child start down the road to financial success.
Preschool (Age 3-5)
Show coins and paper currency to your child and explain the value of each one. Children learn by association and can therefore learn to associate money to value.
Help your child learn to save by regularly setting aside money in a piggy bank. Set milestones for your child every time they reach a new savings goal. Introducing this habit early on will teach your kids patience and the foundational principle of long-term reward for saving diligently.
Buying goods and services
A simple game of pretend grocery shopping will help your children understand the value of money and the concept of needing resources to purchase goods and services.
This exercise is both fun and educational, and it can bring a sense of responsibility to choose their grocery items wisely rather than spending all their money on unwanted things.
Elementary School (Ages 6-10)
If your financial circumstances permit, give your child a weekly allowance. Experts say it’s okay to allow children to spend the money as they see fit, but you also should provide guidance on smart ways to use their allowances.
Encourage your child to save for both short-term and long-term goals. Perhaps they want a moderately-priced toy and an expensive toy. Work with your child on creating a savings plan to help them reach both of those goals.
Sometimes they may only be able to save for one type of toy, and that’s fine since this will teach them to prioritize their wants and needs accordingly.
Building good savings habits
Take your kid to a local bank or credit union and help them open their first savings account. Explain how banks often pay interest on money in savings accounts. This is a good step in teaching them the concept that money can grow more money when strategically used.
Credit cards and bank cards
Children continuously see their parents using plastic cards to make purchases and other transactions. They also accompany their parents for a trip to the ATM machine. These transactions offer you the opportunity to explain that ATM cards withdraw cash directly from a checking and savings accounts and to teach them how credit works.
It’s important to mention that there is no “free money” that comes out of these cards and that having a credit card should not negate responsible spending.
Middle School and Junior High (Ages 11-15)
This age is an excellent time to introduce “pretend” checking accounts that teach children proper check-writing technique, withdrawals, and recordkeeping. It will also teach kids to be accountable for their spending and give them an early insight into how they can curb wasteful expenditure.
Investing and the stock market
Consider exposing children to various investment options (i.e., mutual funds, IRAs, individual stocks, etc.) and teaching them how the stock market works. This is the best time to buy them a book or a course that teaches them about various investment options and how to analyze them.
Credit cards and interest
Consider getting your kid a pre-paid credit card and explaining to them the responsible use of credit. This is a good opportunity to explain to your child the power of compound interest when money is invested correctly and how it can work against you when you’re on the receiving end of interest charges every month on a credit card.
High School (Ages 16-18)
Once your child has a checking account, be sure he/she knows how to record all transactions (checks and debit card purchases) and can reconcile his/her bank statements each month.
Warn them that the balance they see online or get over the telephone may not be the actual balance in the account if checks or debit card charges have not yet cleared.
It’s very important to teach your child how to use credit responsibly. Remind your kids that employers often check credit reports of future employees. College students are often tempted with offers for multiple credit cards, and it can be easy to run up quite a bill.
Explain to your child the dangers of credit cards and work with them to build a good credit rating. Consider giving your child a credit card for one specific purchase type, such as gasoline. Review the charges with them each month when the bill is available.
You can incorporate budgeting concepts by adding a monetary limit. For example, agree to pay for up to a certain monthly dollar amount and they pay any excess.
Bill paying techniques
Be sure your high school son or daughter understands how to pay the bills. Many students go off to college or move out on their own and don’t know the importance of paying their bills on time. Remind them that most bills today can be paid online if the child has problems meeting deadlines.
This sets the habit of paying bills on time and knowing the consequences of late payment fees, etc.
Paychecks and taxes
Students holding part-time jobs are sometimes shocked when they receive their first paychecks. They are not used to reading a paycheck and are often shocked when they find out the money withheld for taxes. Take this opportunity to sit with your kid and review the paycheck and explain to them how the taxes collected go towards building roads, paying for police and fire department services, and fund other crucial government services.
This is also a good time to talk to them about filing a tax return for the first time and the steps needed to file a return.
Money management is not a special type of talent or ability. It is rather a practice that is built over time by being wise with money and expenses. Financial literary is perhaps the greatest skill you can teach your children for their future that will come in handy long into their adult lives.
Once you have the basics out of the way, you can go one step further and teach them how to start and run a business. It can be a fun activity where you take part with your kids to step up even a simple business over the summer like the classic lemonade stand. This will give them a new perspective on learning how to make money rather than depending on the traditional 9-to-5 for making ends meet.
Reviewed and edited by Jason Freeman, CPA, Meadows, Collier, Reed, Cousins, Crouch & Ungerman, L.L.P.