For parents, teaching kids about money can be challenging. But, like it or not, you need to have these conversations. Children ask questions because that’s how they learn. And one way or another, they will. Even if we’re not the ones teaching them. As parents, we have a choice. We can have tough conversations to guide and shape what they know and how they conduct themselves. Or, we can avoid it and cross our fingers that they figure out how to have a healthy relationship with money on their own.
Now, when it comes to discussing money in general – or family finances in particular – there’s no shortage of opinions on the subject. But when you review the millions of words written about financial literacy for kids, there are a few basic topics that repeat again and again, and a couple that have been overlooked. Let’s start at the beginning.
Value is more important than cost
Let’s face it. The concept of money is tough for most people to grasp. For children, it can be like explaining air to a fish.
Ask a young child, for instance, how much something costs and they’re as likely to tell you that buying a house costs five dollars while their favorite toy cost a hundred forty thousand million kazillion dollars. While that may sound adorable, it doesn’t help them much.
What can you do? An allowance for kids is a great start. Give them a set amount every week related to small tasks they do around the house. That way, they can connect money with the effort it took to earn it. Then, when they want to spend some of it on a toy, candy, or whatever, you can remind them of how much they had to do to earn it. For example, ask your child, "Is it really a good idea to spend an hour cleaning your room only to trade it for candy you can eat in a few seconds?”
All those little purchases add up
Spending a dollar may not seem like a big deal. But spending one here, one there, and another over there can really add up – as anyone in debt can tell you.
So, if you want your children to have a healthy relationship with money, you need to address the difference between things they need and things they want. It’s an important distinction that can help them be more discriminating in how they spend, and less likely to spend it as fast as they make it.
Plus, learning that happiness doesn’t come from “stuff” is a lesson that goes far beyond money. Nothing they can buy will ever love them back, or comfort them when they’re sad. It also reveals the things that really matter, the things they can’t do without – their favorite stuffed animal, a hug from mom, or dad’s silly jokes – can’t be bought.
How plastic works
As any parent will tell you, the only time a child understands is “now.” As in, “I want it now.” It’s a way of thinking that takes a while to grow out of, and even some adults haven’t managed it. When you recognize that, it’s easy to understand the power of credit cards. The ability to have what you want, when you want, is very appealing.
But credit cards are a trap that draw people in slowly, pulling them in even deeper over time. Far too many young adults find themselves in over their heads, their financial future ruined by credit cards. As complicated as it may be to explain what credit cards are, and how they work, it’s essential that you do.
Explain it in a way they can understand. Say your daughter wants to buy a cookie but she only has a dollar. She can buy one cookie with cash. Or use a credit card and buy ten. So, she puts ten cookies on a credit card, and off she goes. Then the bill comes. Uh-oh. She still only has that one dollar. She uses the dollar to pay the bill, and buys ten more cookies. And this time, the bill is even higher, until before long she’s paying two or three dollars for each one dollar cookie.
Your money can make money
The first rule of every good financial plan is to pay yourself first. By giving your children this lesson, you can provide them with a solid financial foundation and put them decades ahead of their peers.
Start with something simple. A savings account for kids. Walking your child into the bank to open one could be the most exciting thing he or she does all week. Because, let’s face it, children are fascinated by what adults do all day, and sitting your son or daughter down in a bank with all the serious paperwork that goes along with a kids’ savings account can make them feel grown up and important. Explain to them that the money in their account will earn more money, and explain how interest works.
But if you really want to get children excited about money, open an investing account for them. Granted, a lot of adults are often overwhelmed by the stock market. If you’re one, find an advisor to help. But teaching children how investing works is perhaps the best financial lesson you can teach. And, you can make it fun.
Buy a few shares in companies that mean something to them. Companies that make their favorite toy or cookie or movie, for instance. Then, let them know that they own part of the company that makes it. Every trip to the grocery store or the movies is a chance to talk about how their money is working for them, even if it’s the last thing on his or her mind.
Have a goal
In the 1960s, researchers at Stanford University conducted what’s become known as the “Marshmallow Test.” In it, they gave children a small treat, usually a marshmallow. Then, they gave them a choice. They could have one marshmallow now, or two marshmallows if they waited just 15 minutes. Years later, the researchers followed up and found that the children who waited for the second marshmallow had higher SAT scores, attended better schools, and were more physically fit.
We saved this lesson for last to show just how important teaching kids about money can be. It’s not just financial literacy for kids. It’s so much more. The lessons you teach your children about money now can have a huge impact on how successful and prosperous they grow up to be.