Children learn financial responsibility, or irresponsibility, starting at a young age by watching their parents. If you are overspending, deep in credit card debt or constantly have overdraft fees -- that projects a message to your kids. Being a financial role model starts as early as preschool and continues at least until the time your kids leave for college. Here, tips to teach your kids the importance of fiscal responsibility at any age.
For Preschoolers
Parents can implement a very basic money management system when their kids are as young as 3 years old.
R. Joseph Ritter, Jr. a certified financial planner at Zacchaeus Financial Counseling, a non-profit specializing in financial planning for low-income households, recommends dividing a piggy bank into three compartments. “One compartment is for giving, one for saving and one for spending,” he says. “As the child deposits money into the piggy bank, it is divided three equal ways. As money accumulates, you can help them decide what charitable causes they want to support.” Charities like Toys for Tots appeal to younger kids, or if your child is an animal lover, the Humane Society may be a good option.
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Set goals for the spending and saving slots, such as a new bike or special toy. “Keep them involved and allow them to be part of the decision-making process. Let them physically handle the money when it comes time to give it away or pay for an item,” encourages Ritter.
Another fun way kids can learn about the importance of managing money is by having them help clip coupons (using safety scissors) and then have them present the coupons at the supermarket, financial literacy expert Mary Johnson suggests. Kids will take pride and ownership in this project and it will teach them how to spend wisely.
Preschool kids also love to play pretend. You can play “store” and have kids buy things with real coins, says Marie Phillips a financial blogger and author of Choose Wealth: Be a Millionaire by Midlife. “Be cognizant of attention spans and mental capabilities and keep instruction light and fun. Cover basic things like knowing that money is used to buy things, that coins and currency are kinds of money and then teach them the different denominations.” You can then put price tags on various items — bikes, balls and stickers — and explain why some things cost more than others.
For Kids of Elementary School Age
By
this point, your child can have a little more latitude with the
spending category, but she also needs more guidance from you. “Paying
the child for extra chores teaches them the value of work and
productivity, and they can learn how to responsibly handle the money
they earn,” says Ritter.
Related: Financial Lessons You Must Teach Your Kids
Kids around age 6 or older can learn to be responsible with money by being allowed to manage some of the spending parents are doing on their behalf. One great place to start is with school lunches. “Give a child a little less than they would need to pay for lunch every day and allow them to choose which days they will buy lunch at school and which days they will make and bring a lunch from home,” says Tracie Shroyer, author of Investing in Your 401(k) Kid: From Zero to Little Financial Genius in Five Easy Steps.
At this age, it’s also good to have kids open a savings account. “Set regular times for adding
to their savings, like when they receive cash presents or if they make a profit from a lemonade stand,” says Phillips.
For Preteens
As
your kids get older, you can help them distinguish between wants and
needs. One good way to do this is to work together on a clothing budget.
“It is amazing how quickly kids will stop ‘needing’ expensive designer
clothing when their budget allows only one such purchase every few
months,” says Shroyer.
Related: How to Prep Kids for True Financial Independence
It’s also important to have open conversations about money with your preteens. Pay bills with your kids nearby and ask them for ideas on how to save money on household expenses like electricity or heat. “Also encourage them to save for a major goal and track their progress,” says Johnson.
Discuss the difference between a credit and debit card and encourage the use of the debit.
For High Schoolers
As your kids get older, increase their financial responsibility. A few good ways to do this, according to Johnson, include:
- Have them do the weekly grocery shopping with a set budget.
- Have them research options for financing a car and make sure they have a
financial stake in the vehicle, either by paying for some of it in cash,
co-signing a loan, or taking on insurance costs. - Have them consider a school’s affordability in their college
research.
Related: How Money Stands Between Parents and College Kids
At any age, it’s important to teach kids to not buy things impulsively. “When considering a major purchase, don't hide the discussion from your kids. It is good for them to understand why, or why not, you decided to purchase the item and the thought process that went into it,” says Shroyer. “Sharing the decision-making process of choosing whether to take a week's vacation or buy a plasma television — or foregoing both to pay the orthodontist — can give kids a clearer picture for their future,” adds consumer finance expert Andrew Housser.
Remember, modeling good financial behavior isn’t necessarily about setting up complex scenarios in which you can teach your kids about money. It's about using the daily situations in which you find yourself to discuss money and financial choices with your kids. “They are watching you,” says Shroyer. “Use the time you spend with them to make sure you are modeling good financial behaviors. It just might help you change a few of your own bad habits.”
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A very important part of responsibility to teach kids is delay of gratitude. When one of our next generation of kids is asking over and over in a store for a toy, sports equipment, or clothes I intend to get him - but in another store where it's cheaper - I'll sometimes tell him, "Here's a dollar. You can give it back to me and we'll get your toy here or we'll stop at xxx (Gamestop, Walmart, etc.), get your toy there and you can keep the dollar." They choose to keep the money and wait.
In an interesting study described by Alan Alda in the PBS Series "The Human Spark," small kids were given a cookie and told that they would be given a 2nd cookie if they didn't eat the first one for two minutes. They were then left alone with the cookie. Those who waited and got the 2nd cookie were shown, in a follow-up study, to do better in school and in critical thinking. Which skill came first isn't clear, but developing delay of gratitude is worth instilling on its own merit!
As soon as they can comprehend it, teach kids about the power of compound interest. It's really easy when you start by using the "rule of 72" - divide 72 by the expected annual return, and you have the number of years it will take to double your money (at 10.3% you double every seven years). With this you can show young people the "opportunity" cost of spending versus saving and investing.
In a more advanced lesson that builds on this, you can illustrate the value of regular investments made over a very long period of time. For example, if an 18 year-old starts by investing only $2.56 per day (well less than 10% of the current minimum wage) in a total market index fund, and continues the practice until they are 65, the odds are their tiny investments will be worth over $1 million by the time they turn 65. You can go back more than a century to back-test this theory, and in ever case, you'll see the result exceeds $1 million.
When your kid is 9-10, get your entire months paycheck in one dollar bills (you have to use real money because Monopoly money does not smell the same). Put it on the kitchen table in front of them. Watch their eyes get huge thinking about how rich you are. Then count out the mortgage and put it in its own stack. Car payment. Insurance. Food. Clothes. School books. Internet. TV. Water bill. Electric bill. Gas bill. (obviously you have to know where your money is going before you start this). When all the is done, you can show them what is left for "fun" things in a month. Then one movie for the family. Eating out once at McDonalds. A vacation... etc... Sooner or later you might be moving the "fun" money from one pile to another to make everything work. It is very educational and something that they will never forget.
Giving? Never give a man something he can give himself. Otherwise you become an enabler and you have created a dependent on the State. Stalin and Lenin loved the idea of voluntary giving. This is communist thought, not independent thought. Teach the kids to be communists while they are young.
The one important gift to give your kids: Financial responsibility!? Oh well, I guess that leaves out today's top 10% elite affluent what they did not learn from their parents! Meaning the elite class still do NOT PAY their FAIR SHARE of taxes! For this reason we still need tax code REFORM! =
Better to fund their Roth accounts when they turn 18 instead of paying for overpriced, useless college.
A future unburdened with debt based on old goats siphoning out the nation's wealth?
The poor teach their kids that the World is a dangerous place where there is not enough.
The wealthy teach their kids that the World is a place of abundance where creativity pays off.
" it’s important to teach kids to not buy things impulsively"...that seems more like a lesson for the parents.
Why can't the US government be at the center of such a good article? They're the only preschoolers who need this advice.