Financial Literacy: The Importance of Teaching your Kids about Money
Parents that have children worry about how they are going to save for college for their children. It’s also important to teach your children how to start saving at a young age. Most parents start with a piggy bank or allowance and this teaches your child how to save for the future. Your child might decide to save for something they really want, or your child might decide to save half of their earnings for the future. Some small children can surprise you and become little misers at a young age. There is a pretty cool app called Acorn that is designed for the younger generation. This app lets you round up your spare change and you can choose your goals either short term or long term. The app also allows you to invest with modest risk and in savings bonds. This is something parents might want to check out. If you buy a cup of coffee for $2.60 and pay with the card you linked, the app rounds up the purchase and your spare change goes into savings. This is a good way to start teaching young children about technology in the financial world.
Savings bonds are always a great investment for children. Parents can give them as gifts or request bonds for gifts when their children are too young to know what a gift really is yet. Bonds come in increments and mature in about 10 years. You can teach your child that if they purchase a savings bond for $25, actually the value is worth $50 if they let the bond mature. Some parents start IRA’s for their children at a young age and teach them how to take part of their earnings and deposit the money into their account for retirement. This is a great idea for parents and their kids. There is no limit on deposits into an IRA and this is a great way to have your child watch their investment grow. If people and children start young, they can be millionaires by retirement along with other investment strategies.
Parents might feel inadequate teaching their children about the importance of money if they don’t have a financial background, and you don’t need one. There are a few simple lessons you can teach your children about financial literacy. It all boils down to wants and needs. Do you really want the item, are you just spending to spend? Or do you really need the item for yourself? This is a good place to begin to teach kids about spending money vs saving money. Kids don’t always understand the technical aspect at a young age but they certainly understand what a need and want are. Kids watch their parents spend money on needs like food, housing, and medication. Therefore, the extra things in life should only be purchased after the needs have been met. This might include a family vacation or a new electronic.
Middle schoolers seem to be the consumers that spend their money on the designer school clothes because they view this as a need to fit in. Once they reach high school, teens tend to find a job and money becomes more valuable to them so they decide on a need versus a want. High schoolers start looking at bargains more than those eighty dollar jeans they may have gotten in middle school.
Children also need to understand that money is available only for so many purchases. Therefore, if they have fifty dollars and spend twenty dollars on a want, they will only have thirty dollars left for their needs for a while. The grocery store is a good place to start teaching children about money. For example, you can ask your kids to pick out some chips but you only have money in your budget for one bag of chips. This gives the child a choice and they can compare the prices as well.
Don’t protect your child from bad spending habits. Let your child learn a lesson. If your child spends all his money from his birthday on wants, then realizes the money is gone, let your child feel the experience of poor planning with their cash. This might be a good lesson learned and therefore they probably will ask you for help on how they can manage their money. Don’t save the day by giving the child their money back, let them learn from their mistakes.
Parents can also admit they made mistakes if they bought something they really didn’t need. There are probably many Americans that live beyond their means and are robbing Peter to pay Paul. This is something you don’t want to teach your child. Don’t say we are broke this week and I can’t afford your field trip because we bought the new TV on sale. Avoid impulse buying and teach your children they should avoid impulse buying as well. If you don’t need it, don’t buy it.
When your kids are ready to spend their money, it’s best to let them take their time so they can think about what they like and want to buy. They have their own likes and dislikes and you will find your child is quite unique when they do decide on a purchase.
Kids also should know what credit means. Kids have to realize that using credit costs them extra money in the long run if the bill isn’t paid in 30 days or on time. Teach them how valuable credit really can be if they use it right. Credit is what enables them to purchase a home and a nice car within their budget. Many students seem to fear credit but if they understand how it works and aren’t careless with it, they should be able to use their credit to gain wealth. Kids can always be taught how to use a calculator at a young age to see how interest can pile up on items bought on credit.
Teach your kids that money needs time to grow when they save it in a bank that pays them interest. Years ago savings accounts earned higher interest rates but explain to your child that the bank uses their money and they, in turn, get paid for letting the bank use their money with interest. The interest isn’t much these days but it adds up after a few years.
Children don’t understand the value of money that is in the thousands. They might think $5000 is all they need to survive for the rest of their life when they are small. This is when parents have to teach their children to be a bit more realistic and show them the family budget. This will teach them how fast $5000 goes in and out of your checking accounts every month. Parents don’t have to show their kids their private accounts but they can create an example of a normal household pretend budget. This also helps kids see what housing, food, clothing and the needs of the family cost per month. This doesn’t mean you should have one conversation with your children. This is an ongoing process that your children will watch as they grow up in life. Parents are the ones that set the examples so you are not going to be teaching your children good spending habits if they overhear you telling your friend that you blew the family budget on gambling. This is not a good example to set. Teach your kids how to be positive with financial literacy.