How early is too early to teach your children the foundation of good financial habits? According to a study published by the UK government’s MoneyHelper service, children are sponges when it comes to learning financial lessons at a young age.
The University of Cambridge study found that by the age of seven, children can grasp the value of money and can make age-appropriate financial decisions. Children are also able to comprehend how to save money to delay gratification and how some financial choices can cause them problems in the future. The study went on to show that teaching children about finances from a young age can form positive “habits of the mind” when it comes to money.
So how exactly can parents start to teach their children the value of money? Here are some ideas.
Once your child is old enough to know that they shouldn’t be putting money in their mouth, start introducing them to coins and cash. Explain in simple terms what money is, and how it is used to purchase something you need or want. Let them see you making purchases with cash and credit cards – you can even explain to them that your credit card is a magic place that stores money for you to use!
Once your child can start reading and recognizing numbers, introduce receipts. You don’t have to read everything you bought to them and how much everything costs, but it can be helpful for them to see how numbers correlate to the price of something, especially if they are shopping with you. Being consistent with this can help your child understand how money works by the time they enter preschool.
Use a Clear Piggy Bank
It can be hard for a child to conceptualize what saving money means, but when they see their money growing, they’ll catch on. Yesterday they might have only had a dollar and a quarter, but today they have 2 dollars, a quarter, and a dime. Even if your child doesn’t understand how much each coin or bill is worth, when they see their money grow, they’ll immediately become interested in what’s happening. Talk through what it means when their money grows, and make a big deal of this to build excitement.
To create a long-lasting visual effect, create a chart that shows how much they have saved week over week. Simply seeing the numbers grow on the chart will keep your child focused on the big picture.
Make it Fun
Your child will quickly perceive how you feel about money, so try your hardest to make learning about money fun! There are a ton of ways you can introduce money and financial concepts into playtime. Read money-themed books, use puzzles, board games, interactive games online, and even games you create at home!
If you want to give your child a tangible way to spend their money, consider opening up a home store where they can go shopping once in a while. Stock the store with some of their favorite snacks, toys, and small items, and price them based on their size and significance to your child. Meaning if you have a very coveted toy in your store, price it at a number that requires a few weeks of saving. Just be sure to set a budget for your child before they get access to the shop!
Have Them Use Money in Real Life
Let your child interact with cashiers and bank tellers out in the ‘real world.’ When you are choosing out the item you want, go over the prices of each option. Count out your money for what you are buying together, and teach your child the value of each bill and coin. Then when you get to the cash register, have them hand the money over and collect the receipt.
Putting your child in charge of small purchases like this will not only make them feel important but will introduce them to ideas like budgeting, saving, and how to acquire a new item you may need/want.
Instill a Habit of Saving and Investing
It’s important to teach your kids that money isn’t just for spending, it’s for saving too! Saving will give your child the discipline of goal-setting, planning their expenses, and building security and independence.
Simple phrases like “saving is a great habit to have” and “I love to save” can reinforce these ideas. But we recommend taking a different approach to savings depending on how old your child is. For younger toddlers and preschoolers, you’ll have more luck teaching them how to save for short-term goals, like buying ice cream or a special toy they want. Once they get into grade school, you can open up a simple investment account to show how money can compound and grow.
If you’ve ever asked yourself “How old do you have to be to invest?” know that investing doesn’t have a specific age attached to it! The earlier you invest, the better return you will see, so start young. There are investment accounts that can show growth within a month or two, and giving your child their own bank account will make them feel more responsible and grown-up.
Provide Opportunities to Earn Money
It’s never too soon to teach your child the value of a dollar. Kids will need to have money that they earned so they can learn how to make responsible decisions about using it. Creating an allowance, or a chore system can help you accomplish just that.
Depending on their ages, you can create a task system that pays them an adequate amount per chore done. Make sure to offer a variety of chores that come with a variety of different prices to match the effort required.
Remember, allowance is flexible depending on your family’s personal needs. Some families may work better by giving their children a lump sum allowance on Saturday if they completed all their chores for the week. Or, you may want to give a reward every time a chore has been completed. There’s no one right way to do it!
Avoid Impulse Buys and Shopping Sprees
If your child is old enough to understand online shopping, make sure to teach them about impulse buys. Show them how easy it can be to spend money when they are bored, and how these impulse buys usually end up not being used or valued as much as something they bought after saving a while.
This also brings up the conversation of needs vs. wants. “I need it!” is a phrase used by kids at young ages, because they don’t understand the purpose of a need versus something they want. Talk about opportunity cost as well, meaning if they spend their money on a chocolate bar, they won’t have enough to buy a toy.
Allow Them to Learn How to Borrow
Once your child has a bit of their own money to work with, it is a good time to introduce the idea of borrowing money and creating small debts. When you’re out at a store, and your child finds something they’re interested in, offer to buy it for them as long as they pay you back when you get home. It is easy to teach the concept of short-term loans this way because they’ll be able to see that actual money was spent when they borrowed from you.
If your child is a bit older, consider teaching them about credit loans. If they want something, but don’t have enough money for the purchase right away, have them pay you with what they do have. Then take the remaining balance and set up a system where you will take the rest of the payment due out of their allowance until the credit is paid off completely. You can even add a small amount of interest as part of your agreement to loan money to them. Making a purchase on credit like this will help your child understand what it is like to owe money over a long period of time.
Unfortunately, financial literacy isn’t a topic that is taught in a lot of our schools, making it incredibly important for parents to start teaching about money at a young age. It’s never too early to start your child on a path to financial success, after all, great habits take a while to develop but can result in extremely healthy financial practices later on in life.
When you are teaching these life lessons, we urge you to model good financial behavior when you’re around your children. Children like to mimic their parents, so make sure you model the behaviors around money that you want them to adopt! If you need a little push yourself, our team at Second Opinion Partners is here to help you in any way we can.
We will help you live and define your one best life and can help you plan the course of action needed to achieve your financial goals. Don’t wait, and give us a call today!