|Teaching your kids to be excellent financial stewards|
Thursday, 05 September 2013 00:00Written by Chelsea Bowling
Five steps to help your child understand capitalism and manage money.
Knowledge about personal finance is by no means instinctive. Most children don’t really understand where money comes from, and lacking innate wisdom on this topic, children rely on their parents to teach them the basics of money and money management. If they’re not taught financial responsibility at a young age, they’re often led astray by ill-informed friends and tempting credit card offers, so it’s important to start early and make sure the lessons stick.
1: Lay out the basics of economics
Knowing the fundamentals of economics, money, and capitalism lays a framework for them to understand every other lesson, though how these should be taught depends on age. Even very young children can learn that money is printed by the government, for example, and slightly older children can learn the basics of supply, demand, and private ownership of property through games such as Monopoly.
2: Give them an allowance, and make them work for it
Giving an allowance to children is a time-honored way to show them the value of money, but it only works if done well. After deciding on the appropriate amount to give, which might depend on the child’s age or situation, you should then create certain conditions they must meet before getting their allowance, such as doing chores or making good grades. Otherwise, an allowance is just another form of free money from their parents, which might lead to bad habits later on.
3: Let them open up their own saving account
One of the keys to financial stewardship is saving and investment, and the sooner children learn how powerful these tools are the better their prospects will be. Once they have an allowance or other source of income, you might go with them to the bank to open a savings account—or, for teenagers, even a checking account. Teaching them about interest rates and the benefits of starting early can lead to major rewards in the future.
4: Talk with them about budgets and learn to say no
With both an income and a savings account, the next step is go over the power of budgets. The need for saving is important, but just an aspect of budget management; they need to know what they’re saving for, and what is acceptable to spend on right now. The difference between wants and needs is a key point to consider. It would also be a good idea to get children used to buying their “wants” for themselves, and saying no to any requests that aren’t clear needs: they have their own money, and they can save up for it. Encouraging philanthropically-minded children to donate some of their money to a well-chosen charitable cause also helps them develop empathy.
5: Lead by example
Finally, children learn about financial responsibility by watching their parents. If you and your spouse manage money well, children will learn the right values and habits just by living with you. When you balance your checkbook or go through credit cards, talking with them about what you’re doing will help them learn. When a big spending decision must be made, including your child in part of the discussion can help them understand the different factors in your decision-making process. Personal finance skills might not come by nature, but in this case nurture is all that is needed: careful teaching and guidance about how best to manage money.