Teach Your Kids about Money
We adamantly tell our kids to look both ways before crossing the street, not to talk to strangers and “be careful” every time they get rowdy. We certainly want to protect our children. We just want them to be safe and sound. And although they are wearing their helmets when riding a bicycle, many of us neglect to teach our children the fundaments about money. No harm done, right? Well, mismanaging your money might just lead to a tumultuous life of debt, struggle, emotional warfare and heartache. Gee, in that case, we might just want to walk across the street to the bank for a lesson. Don't worry, we'll hold your hand.
Teach by Example
Whether you feel comfortable about your financial situation or not, it is your duty to teach your children about effective financial decisions and planning. Even if you have to use yourself as a bad example, show them what not to do. Tell them the consequences of your actions. For example, if you want to teach about credit card debt, show them your statements. Explain how interest charges work and accumulate. Tell your kids how hard it has been to get out of debt (or how hard it could be). Put it in their terms: “Because we have to make these payments, we can't afford to go on a big vacation this year” (but reassure them you will still go on a nice trip within driving distance). Make your children realize how easy it was at first to charge things you really thought you needed.
Explain how credit card companies will go after your children in college and get them hooked on credit while they are still young. When the mail comes, show your kids how many credit card enrollment letters are sent. Open them and show how the credit card companies try to sell themselves. Look at the fine print.
Then, before you completely scare your children from never wanting a credit card, explain how credit cards can be useful to building one's credit score or how they can be used in an emergency. It's all about being responsible. Remember with great power comes great responsibility.
Let Others Teach Too
Not only can you teach by your example, you can introduce your kids to others who have been successful with money. If you know of a family who invests in the stock market, owns a business, has rental properties or knows how to save every penny, let them teach your children. You never know when a piece of advice can influence a way of thinking for life. Who knows, it might help you too.
Teach in Life
Life has plenty of opportunities to teach your children about money. Starting when they are about five-years old, you can explain the basics of money while you make a deposit at the bank or go grocery shopping. You can explain how you keep your money in the bank and how you spend that money at the grocery store. As they grow up, you can enhance this to a deeper level. Explain how you have to work to earn money, pay taxes and then the balance goes into your bank account. Show your bank statements and teach them about overdraft charges. Pay your utility bill and mortgage and demonstrate how these bills have to be paid by what money is in your account.
While grocery shopping show the price difference between name brand and generic. Let your children use a calculator to add up all the items in the cart. Work in sales tax. Again, explain how the grocery bill gets deducted from the money in your bank account.
You can do this and illustrate the process of other examples in your life such as buying a new car, refinancing your mortgage, buying and selling stock, analyzing insurance quotes, etc. Use companies' websites as teaching tools.
Start Young
Even if your children are very young (age five or so), you can still begin to teach them basic principles. Start by showing your child the different coins and have them memorize their values. As your children grow, teach them different terminology like what an “asset” is as well as terms such as investment, profit margin, term loan, interest and financing. Help your children to feel comfortable when talking about money. This will help them deal with money with confidence.
Practical Experience
Giving your children some hands-on experience will go a long way. Begin by opening up a savings account (or college fund) and expect them to put in at least 10% of their allowance or money earned. Show them how interest works with each statement. Later, help your children open a checking account and teach them to write checks, avoid overdraft fees, use the ATM machine and balance their account. If they make a mistake, do not get overly upset. Better now than later.
Stock Market
As teenagers, open an E*Trade account and give your children a small amount (an amount you are willing to lose) to invest into a company of their choosing. They can select companies they are familiar with such as Abercrombie & Fitch, Aeropostale, Six Flags, Southwest Airlines and Kellogg. Your teens can track their investment and learn the stock market process.
Credit Card
Allow your teenager the privilege of a low limit credit card only to be used in emergencies. This teaches your teens to restrain themselves and be held responsible if they do not. They get used to having a card without the urge to use it. Plus, it gives parents a bit of relief knowing their teen has a backup if they find themselves in trouble.
Set Limits
Children and teens often think money grows on trees. It is important to show restraint and set limits with your children. That's life: You can't have everything you want all the time. It's ok to tell your children “no” when they plead for something at the grocery store or from the latest and greatest as seen on TV. For small children, it helps to say, “maybe for your birthday” or “maybe for the holidays,” whichever is sooner. It gives them a sense of hope, but foregoing the immediate want.
Getting What They Want
If your child or teen wants something “really bad,” use this as a teaching experience. One option is to make them save up for the item they want. If your child is young, have them save a portion of the item (a goal that is realistic for a child) and once they reach that goal, you will subsidize it. When a child or teen has to save for the item themselves, they appreciate it all the more and feel a sense of accomplishment.
Another option to help your teens get what they want is to give them a loan. You both agree to the repayment terms and your teen learns how a loan works. You can even add a small bit of interest to the loan (and get back some of the money you've invested in your kids over the years).
Work
Encourage your teenager to earn their own money by babysitting, doing yard work for neighbors or by taking a part-time job. They can manage their money with their own accounts, save at least 10% and learn to spend what they have. A job also teaches how to be on time, be responsible, work with supervisors and associates and maintain the responsibilities of the job itself. And it gives your teen experience for their resume.
The Big Picture
Teach your children and teens about the big picture. Going to the movies for example costs more than just the movie ticket price. You always buy popcorn, Milk Duds and a large Sprite. And then there's the cost of gas to get there, the wear and tear on the car, the time you could have spent doing something that earned money, etc. It's just like buying a bigger house. Not only does your mortgage increase, but so do your taxes and the utility bills; not to mention the cost to furnish the larger space or the maintenance costs.
Advertising
Teach your children about advertising and how companies are marketing products targeted at your child or teen. Help your children understand the gimmicks, so they can make a rational non-emotional decision whether to buy or pass.
Give Back
Money is important, but it's not everything. Don't make a fuss about a new outfit or a new plasma flat screen in the house. This shifts too much importance on material items. Furthermore, teach your children the importance of giving back by encouraging them to donate money out of their earnings to a worthy cause.
The Big Two
The next two ways to teach your children about money require lengthy explanations, so we have made them each their own section:
