Teaching your children about money | February 24, 2016
Money, spending, and saving can be difficult concepts for children to understand and not all children are exposed to financial literacy in school. Parents aren’t always sure when or how to start talking about money with their kids, it can be an overwhelming and difficult responsibility for parents who might not know where to begin. Raising financially savvy children means teaching them a variety of aspects from budgeting to planning, to giving them an understanding of the value of a dollar and teaching them about fiscal responsibility. Combining tips and activities for every age, this article seeks to help parents teach their children important lessons about money and personal finance to help them prepare for life in the real world. By making learning about money accessible and fun, parents can build a foundation of good financial skills that are vital to a child’s successful future.
Why is it important to teach kids financial skills?
Tapel, Director and Senior Advisor at CFB: Simply, it is a lost art. In a world of credit and debt, if your child can reach their early 20’s with cash in the bank, they have a good start in life.
Brendan, General Manager at CFB: Teaching goal setting and the creation of plans to achieve goals is an important life skill. Financial goal setting is no different. At home, my wife and I encourage financial management by teaching our three children how to save and accumulate ‘wealth’. Of course, as their bank balances increase so does their temptation to spend…..and then the fun begins! Our discussion with the kids quickly turns to one about controlling their ‘want’ emotions and resisting the immediate spend (thick shakes at a shopping centre). We then discuss any long term goals they may have in regards to a special purchase (buying the special Smiggle pens that they have wanted for the past four months). Although the Smiggle pens are still a ‘want’ rather than a ‘need’ the fact is that they set a goal, achieved it and now the special purchase becomes a trophy/reward that can be referred to in future discussions. Importantly, pocket money at our home is earned. The failure to complete dedicated tasks results in reduced pocket money payments. This promotes the value of working and the rewards of doing a job well.
Zach, Financial Advisor at CFB: It’s important because kids stand to benefit the most from learning financial skills at an early age, as these skills will help set them up for the rest of their lives. The earlier they start putting money away for the future, the brighter their future will be.
When should you start talking to your kids about money?
It’s never too early to teach your children about money. Recent studies show that our relationship with money is formed as early as 5 years old. So as soon as your child starts asking for things that cost money, it’s time to think about talking to your kids about money for the first time. However, the mistake that some parents make is waiting until their children have reached their teens before having the “dollars and cents” talk.
Brendan: At home my wife and I have a tiered pocket money system for primary school, junior school, middle school and then senior school. Simply, as our children get older they need more financial freedom; equally, they get more task responsibility at home. My wife and I started a formal pocket money system when the kids asked about it…we waited for them to show the interest so we could have an engaged discussion. We discussed what tasks should be done, what money would be fair and rules for banking/spending each week. The important part for us was the inclusion of our children in the goal setting and rules. For us, this started when our eldest was in Grade 3 and wanted to start buying some ‘supplementary’ goodies from the tuck shop at school.
Tapel: Valuing the common sense of spending and saving money can never be taught too early. Once your child is old enough to understand the concept of money, you should start introducing them to the idea of saving.
Tips for that first conversation:
- Working gives you money to buy things: start by explaining that things aren’t free, and that adults need to work to earn money to buy things, and that they only earn a certain amount of money each week. This means you can start to talk about buying things you ‘need’ and not always the things you ‘want’.
- You have to wait for things you want: although simple enough once we understand, the concept of saving can be a difficult idea to grasp. Start by explaining how we don’t always have enough money to buy the things we want right away, and that we need to put away small amounts of money over time to buy them; these small amounts of money are ‘savings’.
What are some fundamental money concepts we should be teaching kids?
Although the concepts we may teach to our children vary at different ages and stages of life, there are some fundamental money concepts that serve as a foundation for understanding more complex concepts, and help them live financially smart lives.
Zach: Teach them about how money is the result of hard work and the value of a dollar. From there you can introduce the concepts of instant and delayed gratification, doing a mental cost-benefit analysis on purchases, opportunity cost, the importance of long-term saving and the time value of money.
Brendan: My wife and I have a ‘forced’ saving component in each pocket money payment. They must save a minimum level (15-20%) of their pocket money each week. If they then identify something that they really want to buy in the shops then we encourage them to save more on a weekly basis. We also have incentive levels for when they achieve saving milestones. These are one-off payments when they reach $250.00 saving increments. My wife and I will give them a 10% reward for reaching these saving achievements.
Tapel: Money in your money box is accessible and can be spent. It also doesn’t earn you interest.
What are some key differences in the concepts to teach preschool age kids, primary school age kids, and teenagers?
Zach: Again just start small and work your way up. Relate the concepts you teach kids back to practical examples in their lives. Kids that start earning pocket money and doing chores young will naturally pick up the concepts quicker as they have context, so educating them on advanced concepts can begin earlier.
Brendan: I think the concept should be one of an ongoing discussion of promoting financial discipline and understanding of the rewards and consequences of good and bad financial behaviours. For my son, as he gets older, the pressure to have ‘blow’ money to purchase drinks or food at his footy games on the weekend is ever increasing. My wife and my investment in creating an understanding of the value of money during his primary school years has assisted the more recent money conversations we have had with our son. He understands he can’t always afford what he wants. While his bottom lip still protrudes when we have these discussions, he is aware that only through saving discipline can he afford to enjoy a bit more financial freedom at the next big catch up with his mates.
Tapel: Pre-school, have a money box you can open and a money box that can’t be open. Primary school need to understand that money in money boxes gets spent and earns you nothing, money needs to go into a kids saver account like dollarmite. Teenagers need to understand the differences of interest rates at bank accounts, e.g. interest calculated daily V’s monthly etc. Limit your on-going financial outlays like monthly phone plans and data usage.
What are some quick tips and exercises that could be used to teach kids about money?
Zach: It’s as simple as this; give them positive feedback on good financial habits and provide constructive criticism on bad financial habits and ways they can improve. It’s all about creating good habits early and educating them on how to be financially independent. They will be far better off for it, and so will your retirement fund.
Brendan: Every child will be slightly different. Our eldest son (just a teenager) is starting to be more fashion conscious. If he wants the latest ‘Vans’ then he sets his goals and he saves for them. Equally, he also knows that if we need to buy him football boots or items that he ‘needs’ to play sport with on the weekend; then our weekly coffee money may suffer as Mum and Dad also budget to accommodate the additional spend for his footy boots. We try and show that budgeting is a normal part of a child and adults life. As our ‘wants’ and ‘needs’ compete for the family dollar, we will make choices that may have consequences on normal family activities. The important lesson is that we must continuously monitor and balance our financial and lifestyle desires as a family.
Money as You Grow is a great resource that breaks down fundamental money milestones into age brackets and provides some real world examples and activities to help your kids understand each concept and reach these milestones.
This article is for general information purposes only. It has been prepared without considering your objectives, financial situation or needs. You should, before acting on the advice, consider its appropriateness to your circumstances.
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