Doing chores to earn an allowance, babysitting, or getting a part-time job are all ways to help children appreciate working hard to earn their own money. However, this may not teach them how to manage the money that they earn.
Teaching children how to manage their finances is one of the most important and practical ways parents can help prepare their children for the future. The following are just a few ways parents can help their children learn about how to manage their own finances.
1. Start early
Children as young as five can begin learning how to effectively manage their money. Once they are ready to start earning an allowance, give them the freedom to spend it how they choose; while kids will often spend it all at once at first, this opens the opportunity to begin discussions on short-term and long-term savings. Opening a savings account at a local bank or credit union is another way to incentivize savings.
“There are many things at actually quite a young age that children will understand,” said Ted Beck, the president of the National Endowment for Financial Education.
2. Encourage smart credit card spending
Signing up for a credit card can be tempting for many teens; unfortunately, this can lead many into debt in just a few short months. Instead of starting with a credit or debit card, give teens a prepaid gift card that can be reloaded each month. This teaches them how to manage and monitor their spending each month in a low-stakes environment.
3. Discuss your own financial mistakes
Don’t be afraid to share your own financial mistakes with your kids. Whether it was taking out too many student loans, signing up for a high interest credit card, or getting underwater on a mortgage or car loan, talking to your children about your own financial mistakes can help prevent them from repeating them.
4. Teach them budgeting basics
Whether it’s saving their allowance for several weeks to buy a new toy, or creating a spreadsheet to track how they spend their paychecks, kids of all ages can learn how to budget. For young children, a visual reminder such as multiple piggy banks or jars can help divide their money into different “accounts”; jars for money they can spend now, save for later, and donate to charity are the beginnings of budgeting. Older children and teens can benefit from creating a paper budget including expenses such as car payments or insurance, savings for college, and more.