You’ve spent a lifetime developing an investing style and compiling ideas about how to wisely manage your personal finances. Wouldn’t it be a great idea to pass along some of that wisdom to your family? Here are a few ideas on how to teach money habits to young people.
Part of any practical education for your children and possibly your grandchildren should be how to effectively manage their finances.
Don't assume your kids are too young to start this process. If you wait until they are college age, you will likely miss a golden opportunity to create an enduring set of guidelines for financial management.
Another assumption that you can readily discount is that these lessons will be taught in school. According to the Council for Economic Education, only 21 states require a course in personal finance for high school graduation.
You may be doing a great disservice to your children by failing to give them an explanation of how the primary aspects of personal finance work. Here are some suggestions:
Foundation for Sensible Money Habits
A visit to the store with your grade school-aged children or grandchildren is a great way to begin the process of creating good money habits. Help them understand the role of money and how it is used. Start with cash and coins and eventually move on to how credit and debit cards are an important part of today’s economy.
An important part of this discussion is explaining that a credit card is not some sort of magic money pot. There are certainly multiple benefits to the use of credit cards. Convenience and as a requirement for shopping via the internet come to mind. Additionally, the development and maintenance of a good credit score are a topic for high schoolers. But it is important to make it clear that the bill still shows up at the end of the month and must be paid. Sharing with your students the bill paying process will bring this lesson home.
Money Is Not Only About Spending
As your children and grandchildren become more aware of how money is a factor in their lives, the notion of savings should be brought into the discussion. Developing financial discipline that involves setting aside a portion of their funds (no matter how small) is important. Start with a piggy bank or even glass jar where the child can visualize the money. Move on to a bank account as the amounts become more substantial.
Goal setting and overall financial planning are concepts that will become very important later in life. Developing a budget is a great step toward financial security and independence. For a child, this may mean learning the difference between items that are wanted and those that are needed. Living within one's means sometimes involves a parent who can "just say no." Ultimately, everyone needs to make spending choices that are aligned with the goals that have already been determined.
In discussing how to teach money habits, we have talked about the spending side of the ledger thus far but have not discussed income. Prior to high school, any money a child receives is likely coming from a family member. Some parents grant an allowance for routine jobs around the house. However, some experts, such as Dave Ramsey, feel an allowance for the things children do as being part of a family, should not be an allowance. Instead some recommend an allowance for chores that go beyond the expected.
Parents who provide children opportunities to earn money, help them learn money skills. Be creative: Solicit ideas from the child on ways to earn the allowance. Possibly enhance the opportunity by offering a matching amount based on the difficulty of the task. Kids need motivation, not a handout.
For those of you that want to really be 21st-century parents or grandparents, consider something like the family finance apps Greenlight or Famzoo. These services offer prepaid debit cards and money management tools that allow the parent to maintain control with a great deal of flexibility. One nice feature of these apps is a digital envelope that allows kids to divide their funds into separate buckets for spending, saving and charity.
Investing for Kids
Since minors cannot open their own investment or bank accounts, you can get your child on the road to learning about investments by opening a custodial account. This can be done through your financial advisor or with a brokerage company. It can even be done through the Greenlight app mentioned above.
Saving money can be considered the first step toward financial security but teaching kids about investments can ultimately allow them to accumulate wealth. Everyone learns at a different pace, but introducing investing ideas can possibly begin in middle school. Here are some tried and true basic investment concepts that can be conveyed to your young ones:
- Familiarize them with how financial markets work. Define stocks and bonds, risk versus reward, ETF versus mutual fund, etc.
- When they get a little older, introduce concepts like portfolio creation and asset allocation.
- Help them understand that the goal of investing is to fulfill long-term financial goals not to get rich quick.
- Set attainable goals with the child that can be measured and verified in order to reinforce the purpose of how risk and return are managed.
- If your child or grandchild has assets designated for individual stocks, allow the child to specify that a portion of their accounts will be allocated to companies they are familiar with. Let them come up with the companies they want to invest a portion in.
- It is important that your young ones understand that there may be losses on their account and that investing is about the long term.
How to Teach Money Habits: Conclusion
Helping your children and grandchildren attain financial literacy can be a very laudable goal. Many successful people have developed their own money management philosophy and would like to transition some of those ideas to their heirs. Taking a structured approach to imparting that guidance will allow you to best serve your goal of providing those kids with wise money habits.
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