Lessons every Child should Learn – Earning, Saving and Spending
Teaching your children and grandchildren about money management while they are young can be extremely valuable in helping to prepare them for the future. If you incorporate financial concepts into their everyday lives, you can help them develop healthy habits and give them the tools they need to become regular conscientious spenders. Most kids are more eagar than you might think to be trusted with additional responsibilities.
Grades 2 – 5
Sensible spending
By the time your children reach second grade, you can start introducing them to simple financial concepts. Begin communicating your ideas and values by talking to them about the family budget in very general terms. Explain that you can earn a fixed amount of money, which must cover necessary expenses such as food, housing, and clothing.
You can illustrate this point by including them in simple spending decisions, such as what you buy at the grocery store. Talk to your kids about how much you are planning to spend and ask for their imput when making your shopping list, taking care to explain the difference between “needs” such as milk and bread and “wants” such as ice cream.
Grocery store activity – Kids can learn a lot on a simple trip to the grocery store. For example, you can discuss the differences between generic and name brands, showing them the two specific items. These comparisons demonstrate how they can buy more with the same amount of money by weighing price and quality.
Money Management
This is also a good time to give your children their first experience with financial independence and the responsibility that goes with it by providing them with an allowance. How much to give depends on your personal situation, but parents often are looking for a guideline. One opinion is to calculate a weekly amount based on half your child’s age. The idea is to establish a reasonable amount to teach kids the value of money. Younger children will likely have fewer spending needs, while financial responsibilities may pick up as your children grow older, so it’s important to be flexible.
Once an amount is set, you can establish some parameters. Discuss which purchases your kids may be able to cover with their own resources and how much should go into savings. For example, between the ages of seven and ten they might buy treats or new toys with part of their allowance money.
Consider dividing your child’s allowance into small denominations. If you start with a $4 dollar a week, give it to your child in $1 dollar bills and discuss the importance of putting some of those dollars into a piggy bank every “payday.” This will give your child the dual satisfaction of spending a few dollars immediately while building savings for a specific future purchase. It is important to help children find the right balance between having things today and saving toward things they may want later.
Saving and Budgeting
As they take more responsibility for their own money, your children can begin saving and budgeting for things they want, such as a new video game. When they realize that these games cost more than their weekly allowances, you can explain the importance of setting goals and budgeting to achieve them. A child often comes to learn that part of the gratification of saving and purchasing things with his or her own money is sense of achievement that comes from the investment of time and patience they’ve made toward reaching that goal.
SAVVY SAVING ACTIVITY
Suppose your 10 year old child wants a new video game that costs $40 dollars and is saving $3 dollars per week toward that purchase. Explain how, at that savings rate, he or she will have enough to buy the game in about three months. Then show how much faster the goal can be reached by saving an extra $1 dollar a week. A simple spreadsheet can chart the weekly progress.
Banking Basics
Consider helping your children open their own bank accounts. Many banks and credit unions offer low minimum accounts that earn interest. Encourage your children to deposit all or most of their windfalls, such as birthday money, into their bank accounts – and explain that the more they put in, the quicker they will reach their goals. If your child’s balance doesn’t meet your bank’s minimum, consider setting up your own “bank” at home and matching a small percentage of each deposit. This gives younger children regular incentives for developing good financial habits and may help keep them focused on larger goals.
A Penny Earned
As your children get older, they may decide they want to earn extra money to supplement their allowances and bring them closer to their goals. Younger children, for instance, might make extra money by completing jobs beyond their regular chores, such as cleaning windows in the house or organizing the pantry. Older children may want to babysit for other families or walk neighborhood dogs, or earn extra money when they help their grandparents with yard work, or earn extra money by folding laundry. They will soon be begging for you to take them to the bank so they can deposit their earnings.
Grades 6 – 8
Personal Finance
As your children move into their preteen years, you may want them to start taking more responsibility for managing their own money. One way to do this is to increase the amount of their expenses you expect them to cover. For example, you might want your preteens and young teenagers to be responsible for a portion of their cell phone bills – especially if they frequently send text messages or download ringtones. You also might as them to pay for movies and other entertainment on weekends.
A budget activity when they take more responsibility for their own financial decisions, take the time to sit down with your kids and help them craft a plan for spending and savings. Agree on which weekly expenses you expect your children to cover and determine appropriate portion of each week’s allowance to direct toward savings.
With more money to manage, it’s likely your kids will begin to have larger savings goals, such as new sneakers or an MP3 player. Help them stick to their budgets and explain that if they spend all their money at the mall on Saturday, for example, there won’t be any left to go bowling with friends on Sunday. IF they miss out on such events, they’ll learn the consequences of overspending.
Investing Basics
By the time your kids reach junior high school, they may be ready to start thinking about bigger goals, such as a school trip or buying a used car when they turn 16. The savings accounts they have had up to now are good for smaller, short-term goals, but if their goals have longer time lines, talk to them about investing. Introduce your teenagers to the power of compounding, which can help their savings grow over time. Have them calculate how much their current savings plan could be worth in five years on a hypothetical rate of return. Of course, it is also important to let them know that investments are subject to risks, meaning they may lose money.
At Every Age
Smart Savers Make Savvy Shoppers
No matter how old they are, once your children meet a goal and are ready to make a purchase, encourage them to do some research to ensure they are getting the best value. Compare prices at different stores and consider various brand options. Then let them make their own buying decisions. For some parents, this may be the most difficult part of the exercise because you don’t want to see your children make mistakes. Allowing them to learn from missteps now, however , will help them make better decisions later when they are managing more money with greater consequences.
Give Back
As your kids become more aware of the importance of money, you also may want to introduce them to the concept of philanthropy. Whether you’re donating time, money, or both, make an effort to involve your children in your charitable activities such as fund raising. The experience of doing this as a family will have a lasting impact on your children and they will come to recognize the value of their time.
Keep it Simple
All children mature differently, and no two family situations are the same. So only you can determine how much information to give your children and when they are ready to start taking on more financial responsibilities. The best ways to do that, are to listen carefully to their questions and answer in a manner they can understand. For example, if your children ask if your family can take a trip to Japan, explain that the airfare alone would cost more that their annual summer vacation in the mountains. Try to keep things in perspective for them.
Of course, the most important lessons you teach your children come from the example you set. If they watch you manage your family budget and save for the future, they will develop the same habits. And as they begin making smart decisions about spending, saving, and investing, they will develop financial skills that will serve them well throughout their lives.