Most children do not learn the basics of monetary relations in schools. Even in the United States, only 17 out of 50 states have personal finance courses in high school. This means that parents should familiarize children with all issues related to managing and saving money..
It may seem like a daunting task – to educate your child in finances, especially if you yourself have problems with them. But it is necessary that he embark on the right path and face fewer errors in the future..
Here are seven basic concepts to help you understand how to teach your child how to handle money..
1. The concept of money
Sam Renik, financial program sponsor Sammy Rabbit, says: “Parents should introduce their children to the concept of money when they are little. Preferably, up to 8 years. This is an integral part of life, a must for understanding. “.
Money is not the most important thing in life, but almost all the relationships in life are built on money. Therefore, first of all, parents should teach children that money is a useful tool that facilitates getting what is needed now and in the future. They have different incarnations: coins, paper bills, checks, debit and credit cards..
You can teach young children the values of different money when they sort and count them. You can use role-playing or board games like Monopoly for training..
And you also need to be a good role model, because children hear and see how their parents use and feel the money, every day. So, behavior and words should also show a positive attitude towards money.
2. Cost of work for money
Even if you are not trying to teach, children quickly realize that you can buy something for money. They just see it in practice. But it’s much more important to understand that bills do not appear out of nowhere – you need to earn them.
Many children in the modern world have a lot in their youth and work less than in previous generations. As a result, they do not understand the value of work and earnings. However, to develop personal success in life, a competent work ethic is needed..
It is necessary not only to discuss the importance of work, but also to encourage it. “Give the children a paid part-time job in addition to household duties, such as cleaning. In other words, create an opportunity for them to earn money. And when they grow up, stimulate earning outside the home “- advises Renik.
3. The importance of conservation and division
If children have money, they will probably want to spend it. This is normal. But by the time they go to elementary school, you need to let them know that spending all the money is not good.
Since the waste of money occurs naturally, you need to tell the child about the savings and their joint use. Steve Repack, author of The 6-Week Cash Challenge for Your Finances, recommends using rule 20-10-70:
• Save 20%. This will teach the child to always “pay yourself”.
• Give back 10%. This will teach the importance of sharing and sharing money with other people (gifts, thanks).
• Spend 70%. This will teach you to spend less than you earn, and will become the cornerstone of the rational use of personal resources..
Later, give the child money immediately for a month or half a month and make it clear that if he spends everything in the first week, the remaining three will be with nothing. This will teach him the proper distribution of his own finances. He will always plan spending and learn to save for the things he needs (headphones, phone, sneakers, toys, etc.) over time.
4. The difference between needs and desires
Both adolescents and some adults have difficulty distinguishing real needs from secondary ones. For example, clothing is a necessity, but it’s unprofitable to overpay for brands. Food is an important need, but pizza with friends or fast food is often a whim.
Helping teens figure out this difference requires that they make their own purchases. Determine the budget, make a list of things, and then leave them in a shopping center with a card for payment. Let them make difficult decisions in situations with limited resources and unlimited possibilities. As a result, they will either impress you with the ability to “stretch” money, or they will learn how to solve the problem of choice and exchange. This is a good lesson in real life..
5. How do loans work (if you suddenly use them)
Children notice not only how you buy things, but also how you pay with a plastic card. They will not know that a credit card is not free money, unless you take the time to explain: when you borrow money, you need to return it.
It is not difficult to describe this system. Each time you pay with a credit card, the bank pays for the purchase for you, and then – tells you the price of the debt. If you do not repay it, interest will be charged on this amount, it will grow. This means that over time, the actual price of the purchased item will increase.
It is important that parents explain to their children that there is a reasonable use of money. Buying things out of a whim, impulse spending, and spending that maintains status is unreasonable. Paying for education, home, or investing in a business is the wise use of credit or any other money..
It is important for children to understand how loans work before they receive their first card. They also need to be taught how to plan expenses so that they don’t get stuck in debt or “kill” their credit history..
6. Benefits of investing
The idea of investing can be given to children aged 8 to 12 years. The easiest way to imagine it this way is that the money you have can grow if you manage it correctly. However, when teaching the basics, it is imperative to explain that investing is risky, and a positive result is not instantaneous, and that the risk must be conscious, foreseen in advance.
It is also important to tell you that money grows over time, thanks to compound interest that accrues both on the amount of invested funds and on the emerging plus. That is, the earlier you start investing, the more time you give your money for growth. You can even open a joint investment account, which will store part of the child’s money.
7. The concept of net profit
When your children become teenagers, you can introduce them to the concept of net profit. In a nutshell, this is the difference between total assets (what belongs) and liabilities (what needs to be done or paid). Knowing net profit for children is important because it provides the most financial health.
Let’s say you can make a lot of money. But if you also owe a lot of money, your actual balance may be negative. This deprives financial freedom and forces you to spend all your strength and resources on solving one problem.
Parents can take a blank notebook sheet, divide it with a line into two equal halves, and enter examples of assets and liabilities in each of them. Children in college already have their own assets from part-time jobs or scholarships, as well as some obligations. They need to be listed on both sides of the sheet..
Calculate the difference between these columns and write the resulting number at the top. Circle it and make it clear that this balance needs to be regularly monitored. It is necessary to summarize with a certain periodicity – monthly or annually. This exercise motivates a teenager to increase assets and pay off debts, that is, to increase net profit. Moreover, it is useful for most adults.
When embarking on financial literacy training, do not forget that it is impossible to assimilate all this information in one night. The question of how to teach a child how to handle money takes time. Start with the basic things that make up the more complex ones, and be patient. After all, we are talking about the financial well-being of your child in the future – it costs hard work and diligence.
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Can you offer some effective strategies and tips for teaching a child about money management and personal finances? What age range is most appropriate to start teaching them these skills?
Teaching a child about money management and personal finances is crucial for their future financial success. To start, introduce basic concepts like saving, spending, and budgeting in a fun and engaging way. Use real-life examples and involve them in decision-making processes, such as setting up a simple allowance system or creating a savings goal chart. As they get older, teach them about earning money, different types of bank accounts, and the importance of setting financial goals. Encourage open discussions about money and lead by example through your own financial behaviors. The most appropriate age to start teaching these skills is around 5-7 years old, but it’s never too late to begin educating them about money management.