Most young children don't understand where money comes from, but they know that they can use it to buy the things they want. As a parent, it’s your job to teach your child about the value of money — and the sooner, the better! By teaching your children how to handle money wisely at a young age and implementing good money habits as they grow, you’ll help build a solid foundation for making a lifetime of responsible financial decisions.
Here are four simple lessons for teaching financial literacy to kids.
1. Managing an Allowance
An allowance is an amount of money that’s provided on a regular basis, usually with a specific purpose. Some parents ask their child to earn an allowance by doing chores, while others give their child an allowance with no strings attached. It’s also an option to do both: Pay your child a small allowance, and then give him or her the chance to earn more money by doing extra chores.
An allowance is an effective first step in teaching your child about financial responsibility. With allowance money in hand, your child can begin saving and budgeting for the things he or she wants. Plus, by thinking through the lessons you’d like your child to learn, you can create guidelines that will reinforce those teachings. Here are some examples of how you can reinforce good money management for kids with an allowance:
- Establish responsibilities. Sit down and talk to your child about the types of purchases you expect him or her to make using the allowance.
- Build savings habits. Teach your child the importance of saving money by establishing how much of the allowance should go toward savings.
- Start a budget. Does your child want an expensive item? Teach them the value of creating a budget so they can manage their responsibilities while saving for the things they want.
- Incorporate giving. Instill the joy of generosity in your child at a young age!
2. Opening a Bank Account
Taking your child to your local bank or credit union to open an account is a simple way to introduce the concept of saving money. Your child will learn how savings accounts work and will soon enjoy making deposits.
Many banks and credit unions have programs that provide activities and incentives designed to help children learn financial basics. You can also help your child develop good savings habits by teaching them how interest compounds. Show them how much "free money" has been earned on deposits. And if you want to incentivize good saving habits, offer to match whatever your child saves towards a long-term goal.
3. Saving for Financial Goals
Let's face it: Children don't always see the value of putting money away for the future. How can you get your child excited about setting and saving for financial goals? Here are a few ideas:
- Let your child set his or her own goals (within reason). This will give your child some incentive to save.
- Tape a picture of an item your child wants to a goal chart, bank or jar. This helps a young child make the connection between setting a goal and saving for it.
- Divide and conquer! If your child wants to spend all of their money now, show them the benefits of splitting it between saving, spending and sharing to work toward multiple goals at once (and to teach financial responsibility, of course).
- Help your child learn the difference between short-term and long-term goals by writing down each goal and the amount that must be saved each day, week or month to reach it.
Finally, don't expect a young child to set long-term goals. Young children may lose interest in goals that take longer than a week or two to reach. And if your child fails to reach a goal, chalk it up to experience. Over time, your child will learn to become a more disciplined saver.
4. Becoming a Smart Consumer
Commercials. Peer pressure. The mall. Children are constantly tempted to spend money but aren't born with the ability to spend it wisely. Your child needs guidance from you to make good buying decisions. Here are a few things you can do to help your child become a smart consumer:
- Set aside one day a month to take your child shopping. This will encourage your child to save up for something he or she really wants rather than buying something on impulse.
- Just say no. You can teach your child to think carefully about purchases by explaining that you will not buy him or her something every time you go shopping.
- Show your child how to compare items based on price and quality. One effective way to explain money to a child is to allow them to see your financial habits in action. For instance, when you go grocery shopping, teach him or her to find the prices on the items or on the shelves, and explain why you're choosing to buy one brand rather than another.
- Let your child make mistakes. If the toy your child insists on buying breaks or turns out to be less fun than it looked on the commercials, eventually your child will learn to make good choices even when you're not there to give advice.
Build a Strong Future
Your child’s financial future is just as important as your own. If you’d like to discuss how you can save more for your child’s education or ways to pass on your legacy, contact a Farm Bureau advisor to start the conversation.