7 Essential Financial Lessons to Teach Your Kids
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The connected kids of today are exposed to countless ads and social-media highlight reels showcasing must-have products and services. Peer group pressure, extensive screen time, and the dominance of online shopping can encourage focusing on consumerism as a way of life – without regard for the other side of the equation: savings and earning money. Kids who don’t receive money lessons earlier in life could grow up without the financial discipline and know-how essential for building security and wealth.
As a parent, you can play a central role in educating your kids about the role of money and how to treat it with respect. Budgeting, saving, planning purchases – these money skills can be seen as any other life lesson, like learning to drive a car for example. If you don’t guide your kids on how to manage their finances, the chances are someone else will. On the other hand, if you give your kids robust money-management guidance, you’ll be providing them with a head start, as well as skills they can use for the rest of their lives.
Why teach your kids about finance
Learning to manage money – budgeting, saving, and controlling spending – is a critical life skill that even adults sometimes have problems with. If your child acquires solid financial skills from the start, they can avoid the common traps associated with falling into debt and can be better prepared for the financial responsibilities and challenges that come with adulthood. Whether it’s earning their own income or saving up for a house, having strong money-management skills is crucial for just about any aspect of life.
Additionally, with things like tap-and-go payments, in-app purchases and online shopping, exposure to cash is rarer than ever before. As a result, transactions happen rapidly and kids don’t see cash changing hands. The prevalence of invisible money makes it hard for kids to understand money as a tangible item with real value. For these reasons, parents need to take a proactive approach to guiding their kids on understanding money and making smart financial decisions.
7 basics to teach your kids about finance
These seven basics can be taught to kids starting at a young age, and mastering them means your kids will have great fundamentals for gaining further financial literacy.
1. How money applies in everyday life
To start, show your kids how money applies with real-life money lessons. Even younger kids are capable of understanding the concept of money and how everyday items cost money. Work the subject of money into your daily conversations, like when you’re filling up on petrol, comparing brands at the supermarket, paying with a credit card , or applying for a personal loan for an emergency expense.
2. Managing pocket money and earnings
Teach your child how to manage their pocket money and part-time-job earnings, whether it’s putting away some in a savings account, saving up for a specific buy, or checking their bank balances. Illustrate why you should spend only what you earn. You can show them how to budget, track spending, pay bills, and use cash and debit cards to pay for things using their own savings. When your child starts earning money, talk to them about rates of pay, tax, and super.
3. Wants vs needs
Guide your child on the difference between wants and needs. Basics like food and clothing are essentials, but the latest smartphone or a new toy are likely wants. Talk about ads and how they’re designed to encourage you to spend money on things you might not need.
4. Opportunity cost
Kids should learn about the opportunity cost of everything they choose to buy and understand why they can’t have everything. Have discussions with your children about things like choosing a new video game over a pair of sneakers they actually need. Learning about opportunity cost gives your kids a sound basis for weighing up their purchases and the consequences of their spending decisions.
5. Planning purchases
Demonstrate how to plan for purchases, as this can teach your kids financial discipline and how to avoid impulse spending. You might want to ensure your kids buy bigger items only when they’ve consulted with you and taken time to think the purchase through.
6. Saving and compound interest
Show your kids how to set savings goals, track their savings, and explain to them how compound interest can have your savings working hard. Use specific numbers, timelines, and visual diagrams to show the way compound interest grows savings over time.
7. Virtual money is real money
Demonstrate to your kids that virtual or invisible money is real money as well, and just like running out of cash at the store, spending virtual money has consequences. For example, you can use your debit or credit card to pay for something and show them the changed balance on your app.
Take a proactive approach to teaching kids about money
Understanding how money works in everyday life and having financial discipline can take time for kids, especially younger ones, to master. Real-life examples, frequent communication, and an encouraging, supportive attitude could make all the difference when you’re looking to engage your kids on learning the most critical lessons about money.
Be patient and positive, and make it an enjoyable learning experience, especially for younger kids. Take the opportunity to incorporate money discussions in your daily life, and set a great example by being fiscally accountable yourself. If you take a proactive approach, you can help your kids avoid the dangers of reckless spending and bad debt, and set them up for responsible financial management in adulthood.