Seeing your child succeed creates a sense of pride and accomplishment that’s unlike anything else you can experience as a parent. It’s a fantastic feeling to watch your kids grow as they learn and have life experiences. A significant way you can help foster their future success is to teach your children about financial literacy.
Financial literacy is the ability to understand and effectively apply various financial skills to one’s life. Whenever individuals are financially literate, they make smarter decisions, setting up for present and future success.
Unfortunately, many Americans feel that they did not receive enough education in this category in their youth. A study showed that almost a quarter of respondents said their parents didn’t teach them any money management skills growing up.
It can be challenging to know when and how to teach your children about finances. Some parents may find it awkward to sit down and talk about money, especially with younger kids. Here are some of our top tips on how to teach financial literacy to your kids.
Start With the Basics
Children develop a basic understanding of money concepts by the age of 3 and begin to set habits by age 7. If your children are out of that age range, it isn’t too late to make a difference in their spending and saving practices.
- Allow your children to see or be a part of the purchasing process. Being able to see the exchange of money for goods is an opportunity for your kids to see that everything has a cost. Whether it’s a trip to the grocery store or paying regular bills, your child will begin to develop an understanding of the cost of living and running a house.
- Use a piggy bank or a clear jar to save money. The piggy bank is a classic money management tool that makes it easy to save money as it is difficult for your child to access the cash without your help. A clear jar works well because of the visual aspect of showing how much money they saved.
- Show your kids good financial habits. You can tell your children about saving money and making smart decisions, but they will always follow your example more than they will follow your words. Showing them how to responsibly spend and save will impact how they see their own finances.
Early Financial Management
After teaching the principles of money, allowing your children to manage their own cash can be an excellent way for them to build knowledge through experience.
- Try giving allowances for chores and tasks around the house. Allowances are a beneficial way to learn how to earn money. They can also help your kids develop a sense of independence in their financial decisions.
- Let your child make purchasing decisions with their money. Giving your child some freedom in how he or she spends creates excellent learning experiences. You can guide them, but allow them to make the final say. Mistakes are teachable moments. Failures when the stakes are low lead to wiser decisions when purchasing on a larger scale.
- Differentiate wants and needs. The ability to perceive real needs versus wants is paramount to financial success. Unfortunately, there are a lot of adults that struggle with this concept and set their children up for failure as a result. Self-discipline will help them to discern advertising and social pressure from actual needs.
- Delay gratification. Waiting to make a purchase teaches self-discipline and helps differentiate the wants and needs mentioned earlier. The “wait-a-day” rule works well to practice this. If your children see something they want, tell them to wait a day to buy it. It will most likely be there the next day if they still want to make the purchase.
More Advanced Financial Literacy
When your kids reach middle school or high school age, they can begin to learn and apply more advanced money management skills.
- Make sure they have a savings account in place. You may have already started a savings account for your child. If so, this an excellent place for them to start putting aside money for the future. If not, help them set up a savings account at your bank or a financial institution you trust. A local bank is an excellent option for a first-time bank customer.
- Budgeting. If your kids are doing chores for an allowance or have a part-time job, help them create a budget for their income. A budget is easy to start if you have one of your own that they can use as a template. If not, they can write it out with pen and paper or find a template online. If your child is older and has a smartphone, they can use online banking and budgeting apps to manage their finances.
- Teach them how credit works. Credit cards are readily available to high school graduates and college students and can cause a mess if used without self-control. Teach your kids that if they are going to use credit cards, they have to set boundaries. Plastic makes it easy to spend outside of one’s means.
- However, don’t make all credit out to be a scary monster. Be realistic with its pitfalls and useful applications. When they are ready to make a large purchase that requires a loan, such as a house, it is helpful to have some established credit. They need to understand concepts like interest and how to pay off debt responsibly.
- Teach them the power of compound interest and smart investment. The importance of investment is crucial to teach your kids. Even though they may be in high school or college, it’s never too early to talk about a retirement plan. You can’t be there with them when they start their first full-time job, but the financial wisdom you pass on can be.
Remember, you can’t teach every element of financial literacy in a day. It’s something that is developed and nurtured over time. Be patient and show your kids how smart money management makes a difference in your life.
Want more banking advice? Visit the Community Point Bank blog for tips and information on smart banking. Want a bank that offers resources to set your child up for financial success? Contact us today to talk with a friendly, knowledgeable staff member about how we can help you.