The concept of financial literacy is a vital life skill that is rarely taught in schools making it difficult for kids to know how to develop good habits with money. Shockingly, many parents aren’t teaching their children smart money habits either. According to T. Rowe Price’s Eleventh Annual Parents, Kids and Money Survey, almost 50% of parents revealed they miss opportunities to educate their children about money. Nearly a quarter of the sample population said they were reluctant to talk about money and financial topics with their kids.
As a parent, you want to lay a foundation that your kids can build upon to succeed in life. This means giving them important lessons about money, but many are unsure about the best way to do it. Here are some helpful tips on how to teach kids while helping them secure their future when it comes to understanding money.
teach your child the habit of saving for the future
A recent survey by LendingClub found that many American adults are struggling to pay bills, with almost 54% living paycheck-to-paycheck, without savings for future needs. There are many reasons people can find themselves in this situation, but instilling a habit of saving for yourself and then demonstrating this to your children can help your kids establish this healthy habit early. Start teaching your children the habit of saving at a young age so they will understand the benefits of establishing control of their finances. Have them choose a percentage of their allowance or the money they make working that is either manually or automatically put into a savings account.
While teaching your child to save is great, without the “why” behind it they might give up or just decide to spend the money they have earned. They can save for smaller goals such as a phone, a gaming system, a bike, concert tickets, or a new pair of shoes. This will teach and encourage them to save and let them see the tangible results in the short-term. In addition, you can give them a big goal to save for. Some suggestions are 1. Save for a car. If you are able to, maybe you can match what they save to further incentivize your son or daughter. 2. Save for a gap year before going to college. 3. Save for college. 4. Save for their first home. Just make sure to have them write their goal down and have someone to encourage them, or hold them accountable to achieve it! Having this “why” will help your kids escape the pitfall of constantly seeking instant gratification when it comes to spending.
The second tip is to get your child on a simple budget. There is a great chance your teen is addicted to their mobile device, so you can easily introduce them to a simple multi-platform app, YNAB. (YNAB = “You Need A Budget”) This software will teach your child the habit of budgeting their money, regardless of their income amount. Check out our blog breaking down how to use YNAB. There are other options for budgeting as well including having them create an old-fashioned spreadsheet. How you choose to help them create this habit is up to you, but you might want to consider your child’s learning style and a method they will easily stick to.
help your kid make smart spending decisions
First off, help your children understand that money is earned. They should also be able to spend their money on things they want and enjoy. You want your child to feel good about the purchases they are making. Kids tend to take care of items they have worked hard to pay for with their own money. Let them decide a percentage of money that they make each month that they can spend, they can save for something bigger, or spend it on smaller items. Every kid is different, some will want to save everything and some will want to spend it all right away, but teaching them a healthy balance is key.
encourage the act of giving
Once your child starts earning, it’s time to teach them the importance of giving. Help them pick a charity or an individual who might need a little boost. Typically they will be drawn to give towards their passions which will help them discover their purpose as well.
teach your child about investing
Once your kid learns about saving, budgeting, spending, and giving money, it’s time to teach them about investing. This knowledge can help them grow their money to attain financial freedom at an earlier age. You can demonstrate the power of compound interest over time. Albert Einstein said, “Compound interest is the eighth wonder of the world. He who understands it earns it; he who doesn’t pays it.” Once children understand compound interest, they may be more inclined to become financially healthy adults. Money Geek has a game called “Double the Penny” which teaches kids aged 13-18 about compound interest. Another simple tool is the Power of Compound Interest Calculator by Cool Kids. You can have them choose a stock to invest in, maybe a company that they love. You can even open a Roth IRA for kids under 18 and serve as the custodian, or they can open their own account once they turn 18.
You might be reading this and thinking, “What if I am a Grandparent?” If you’re a grandparent, and wondering how to teach your grandkids about money, Goodwin Investment Advisory would love to help you teach your grandkids as well!
If you are unsure what to invest in, our advisors at Goodwin Investment Advisory are available to help you get started. You can schedule an intro call with one of our consultants and they will get to know your story and answer any questions you might have.
These suggestions are based on generally accepted best practices, but are not right for everyone. Consult your doctor in making decisions about exercise and nutrition. Goodwin Investment Advisory does not endorse any of the organizations referenced in the articles, and receives no compensation from them.