As a parent, your primary responsibility is to help your children grow up to be independent, well-functioning adults. A key part of that development is teaching them to make good financial decisions. And while it’s never too late to learn how to manage finances, the earlier financial literacy starts, the better.
Parents who can pass on their financial wisdom, knowledge, and values to their children are providing them with a solid foundation. Important financial concepts—how to save, budget, and make smart purchasing decisions—instilled when kids are young will give them plenty of time to practice these skills before their choices impact their lives in a meaningful way. In fact, a 2021 FINRA National Financial Capability Study found that early financial knowledge can lead to greater financial stability in life. Further, it has been shown to improve behaviors related to budgeting, saving, and credit.
So what lessons should a child learn about personal finance? Most experts say to start with these vital first steps:
- Saving money—Learning how to save is a critical part of personal finance, and teaching kids the importance of this early on will only help them develop habits that will serve them for a lifetime. When children are quite young, a piggy bank is a good way to teach them how to set aside a portion of any money they receive from chores (more on that later) or birthday gifts. As kids get older, opening a savings account for them will reinforce the concept of consistently setting aside money rather than spending all of it.
- Budgeting—Once children get some money, they need to know what to do with it. As we’ve pointed out, some of it they’ll save. But learning how to budget the rest is an important skill that will help them better understand financial goals (a new bike or video game, for instance), math skills, and costs. Being comfortable with making a budget also enables kids to understand that money should be used to take care of expenses, savings, as well as things that are fun.
- Smart purchasing—When kids are young, most of their purchasing decisions are naturally governed by parents. But it’s never too early to teach children how to make smart purchases. This could include helping them learn how to compare the cost of the things they want to buy, how to value quality, and the importance of understanding the difference between what they want and what they need. For instance, if a child really wants a particular video game, help them to understand what short-term purchases they can forgo now in order to have the money to buy that game. This is a good lesson in how to make a smart purchase.
Of course, at the core of all these financial lessons is helping your child navigate what it means to earn their own money. In their younger years, the money they’ll have will likely come from gifts for birthdays and holidays. But as kids begin to mature, it’s important for them to understand how they can actually earn their own money. Mowing the lawn and babysitting are appropriate kid-friendly jobs for young teens. As they get older, they can move into jobs with more structure and responsibility.
Giving children an allowance is another way to teach them about the responsibilities that come with money. Most parents tie an allowance to household chores that a child will do each day or week. Making their bed, putting toys away, and taking out the trash are just a few of the ways that kids can earn a set amount of money each week or month. Structuring an allowance this way reinforces the idea that money has to be earned, and therefore instills a sense of accomplishment and pride.
There are those critics, however, that believe children should not be compensated for things that they should be doing as a matter of course as members of a family. With this view, if an allowance is given, it should be for when a child performs a task or service that goes beyond what is naturally expected.
No matter which approach resonates most strongly, the most important thing is consistency. Jayne A. Pearl, co-author of the book “Kids, Wealth and Consequences” thinks of allowance as “learning capital.” If a weekly allowance is given, be sure the child performs the chores that earned them the money in the first place. If the chores are not complete, explain why you’re withholding their allowance until the tasks are done. One of the most important financial lessons you want to instill in your children is the value of work and why consistency is so vital. It will benefit them as they grow into teenagers and well beyond into adulthood.
Our experienced bankers have great insights into developing financial management skills. Start a conversation with one of them today.
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