As parents, we continually struggle to pass knowledge on to our children. Unfortunately, sometimes financial knowledge is left off the list or lost in translation. To prevent that happening, consider the following five tips to help teach your children about money:
It is never too early to start. Just like saving for retirement, the earlier you start educating your children about money, the better off they will be. You can start with some early lessons around earning and spending. For example, show kids that when they do a job they can be rewarded with their own money. Give them examples of how much the money they’ve earned will allow them to buy. This puts into perspective how much various items cost and the amount of work needed to afford something they want.
Understand the Save, Share, Spend mentality. For every dollar earned, either through an allowance, babysitting or other jobs, familiarize kids with the concept that there should be three buckets for their money: the amount they want to save for the future, the amount they want to share with others and the amount that is left over to spend. This will reinforce the idea that it is important to save for something special and give back to others in need instead of simply spending whatever makes its way into their pocket.
Be smart about debt. There is an opportunity cost associated with every decision. If you spend now, you will have less to spend later. If you spend more than you have, you will incur debt. If you take on debt, 1) your future earnings will be reduced by the amount needed to pay off prior purchases, and 2) you will pay an additional amount above the original purchase cost through interest. The lesson to impart is that it’s better to wait and save for that special purchase than it is to jeopardize your future income stream.
Teach goal-setting and budgeting Help kids understand how to budget effectively and set goals around spending. Whether it’s to buy a desired toy, go on a special trip or purchase that first car, setting and achieving a financial goal comes with its own reward. There is value in learning to set the goal, patiently watching the money accumulate and then realizing your success with that special purchase.
Take away the taboo of talking about money. For many, money is a very taboo subject. People don’t want friends or family to know how much they make or what they spend it on. Change this trend by sharing information with your kids about your individual situation regarding money. Talk through the various thought processes that occur when deciding how to spend, save or share your money. Finally, tell your children the lessons you have learned, including the mistakes that you have made along the way.
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The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.
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