Build Good Money Habits in Your Children
by Jack Whitley with contributions from Dennis Doble and Alison Wilcox
Stop the Parental Money Faucet!
When it comes to building good money habits in children, experience is the best teacher. If parents want their children to develop money habits that they will carry all the way into adulthood, financial literacy must be taught at an early age, and they must exhibit their own financial responsibilities. Here are a few ways you can help ensure that your children will be financially responsible for years to come:
- Introduce them to money early on:
There are several ways in which parents can introduce the concept of money to their children. Start with showing your children that money is used to make everyday purchases by paying for items with cash, or by going over past receipts. This is a great way to first introduce the concept of money to your children and will give them a much better understanding of how it is used. You might also want to consider including your kids in family conversations about your finances, so that you can effectively communicate your family’s views on money and instill these values early on. By highlighting your long-term goals and how you ultimately achieved them, important lessons about cost-cutting and effective saving can be taught to your children.
One idea for young children is to purchase them a clear piggy bank, so that children can begin to identify the different types of currency and see how their money accumulates. Allow them to make purchases both when the piggy bank is close to empty and when it is full, so that they begin to realize the power that saving their money can ultimately have.
Dennis suggests attacking the Amazon phenomenon early! Teach them that those boxes delivered to your home still cost money. He was told a funny story recently about a child being told that they can’t afford a toy, to which the child replied, “that’s ok…when I get home, I’ll just order it on Amazon.”
- Create Opportunities to earn money:
One of the best ways to create opportunities for your child to earn money, particularly at a young age, is through an allowance. An allowance can be a great educational tool for a child because it gives them experience with real-life money matters and lets them practice their saving and spending habits. Be careful with an allowance, however, by making sure that saving is still encouraged, and that the amount provided is not enough to provoke careless spending habits.
“I like the concept of earning dollars to promote learning about money,” Dennis says. “Personally, I’m just not a huge fan of allowances, yet it does work for some families. I’ve been reading about cultures where children do things voluntarily to help out their family for the pure joy of knowing that they’ve contributed to the household. It’s early, so when I figure out how to get my daughter to take out the trash voluntarily, I’ll clue you in! Both of my kids have been setting the dinner table recently, but I’ve already jinxed it.”
Parents can also suggest that their children find creative ways to make money by having them tap into the entrepreneurial spirit. Beginning at a young age, there are plenty of opportunities for children to make money by seeking jobs within the neighborhood. Encourage your children to assist the neighbors with things such as yard work or baby-sitting, as this will teach them the value of hard work and that money is earned, not given.
- The Importance of Saving:
To ensure that your children understand the importance of saving their money, consider implementing a house rule that requires them to save a certain percentage of their income. This will ultimately deter them from making any unnecessary purchases, and will teach them discipline, delayed gratification, and goal setting. You might also want to consider a matching arrangement in which you contribute a matching amount of money every time they reach a certain dollar amount in savings themselves, so that they work harder to ultimately reach their savings goals. Saving money is a learned skill, and without some sort of parental guidelines, your children may not be so inclined to save.
- Open a savings account for your child:
One of the most effective ways to communicate the value of saving to your children is by opening a savings account in their name. A savings account will introduce the concept of compound interest (interest earned on interest) and communicate the power that saving money can have. To better illustrate this concept, consider using an online compound interest calculator that will show how their money may grow year over year as a result of the savings account. This is great for the visual learner and can only help to encourage future savings.
In addition to a savings account, another great option is a Roth IRA. If your child has earned income, he or she can contribute to a Roth, and their contributions and earnings will grow tax-free. Consider matching their contributions (they put in $500, and you put in $500 as an example) to teach them about 100% rate of return versus market returns of 6-10% per year long-term! When they start their 401k years later, they’ll already understand the concept.
- Encourage goal setting
Goal setting is important because it leads to good spending habits, and helps children differentiate between their wants and needs. A common practice is to have your children write down a wants list, along with a deadline for obtaining each item on the list. This practice will build good money habits in your children by showing them that there are tradeoffs and costs involved with nearly every decision, and that to obtain their wants they must budget their money effectively. The objective of this type of goal setting is that it allows children to visualize their savings goals, and as a result provides an added motivation to save.
There are several different ways to build good money habits in your children, but the most important part is that the conversation should begin early and at home. Financial education in schools is virtually non-existent and does not incorporate family values. Thus, the responsibility often lies with parents and grandparents to teach financial literacy in accordance with their own beliefs.
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