Raising children means teaching them how to navigate this world. One of the most important life lessons to teach children is about finances. Managing finances – including knowing how to budget, stay out of bad debt, and build wealth – is one of the most important skills people of any age can have. Young people primarily pick this skill up from their parents or a close family member. Indeed, one report in the UK showed that nearly three-quarters of young people get their financial literacy from their family members. Teaching children about personal finance is one of the best things you can do as a parent!
Unfortunately, for many parents, teaching their children financial literacy isn't altogether intuitive. There are so many nuanced concepts, ideas, ways of doing things, and figuring out how kids can practise taking care of money is a challenge on its own. Here are five tips to make teaching this essential life skill to your children much more straightforward!
What Is Money and What Is Personal Finance?
For parents, perhaps the best place to start for children (especially younger ones) is the most straightforward question of all: what is money?
It sounds like it should be a trivial question to answer and, it is, but for children hearing an explanation makes it easier to understand the entire concept of finances.
At its core, money is a flow of value. When someone gives you £20 to cut the grass, for example, they're saying that the job you did is worth whatever £20 can buy you. Maybe that value is a few groceries or a couple of movie tickets. Or, for children, that value might be a few toys.
When you earn £20, someone “flowed” that value towards you. You have the opportunity, then, to “flow” it to someone else in exchange for goods and services, or you can “store” some of that value by investing or putting it in a bank account.
Naturally, the explanation varies depending on the age of your child. However, the critical thing to explain is that money is representative of value. When people go to work, they exchange labour for money, which indicates the value of the work. Money represents value.
Teach Your Children About Earning, Saving, and Spending
With the concept of money as a signifier of value in mind, the next tip is to teach your children the concepts of earning money, saving it, and spending it.
These concepts are often easiest to teach with a prepaid debit card. In the US, Greenlight is one of the best kids' debit cards for teaching money habits. For the UK, GoHenry is an excellent choice! Indeed, we've already gone over the benefits of GoHenry in our extensive GoHenry Review (which, if you're considering one of these cards, we highly recommend reading!).
With a prepaid debit card, your kids can get a feel for the modern world of money. Parents can load their kid's debit card occasionally. That acts like getting a paycheque. Then, they'll see the balance on their card, which is like a bank account balance that rises when a new paycheque comes. And, finally, they can spend the money directly from the debit card, which teaches them to spend what they have and not incur unnecessary debt. In effect, it teaches them to live within their means.
Ideally, children should save 10% or so of their “income” to get used to this practice early on in life. The earlier kids get into healthy money habits, the better off they will be later on in life!
Make a Simple Budget with Your Children
Unfortunately, many adults aren't adept at budgeting. One study in the UK showed that more than half of adults don't make a budget. Sadly, not having a budget is one of the easiest ways to overspend and get into debt. In the world of personal finance, this is arguably the biggest reason why people run into issues.
Part of the reason not having a budget is so disastrous for personal finances is that a budget is one of the best ways to allocate and know where your money is going. It's one of the best ways to plan for expenses you'll know you have but likely wouldn't take into account if you just went off your paycheques each month.
Additionally, it's easy to overspend unintentionally. That £50 you spent at the bar on drinks with friends, the £20 you spent at a restaurant, and the £30 you spent on a few items at the local store total £100. Yet none of these expenses feels big on its own, which is why it's easy for people to dig themselves a financial hole through numerous small expenditures.
Teach your children to budget. At first, the budget could be elementary. It could just be three lines:
- Spending Money (also, help your kids track what they're spending on)
- Saving Money
Let's say you give your child £20 a week as an allowance. Their income each week would be £20, their spending might be £15, and their saving would be £5. If you load it up on one of the debit cards above, you could add the £20 there and let them spend £15 on the card. That would leave £5 per week in the account, which they could then use for an additional toy after a couple of months.
As your kids get older, the budgets can be more involved. If you feel comfortable sharing all the information, you could also involve your kids in your budgeting process. That will give them a sense of making a more complex budget with line items for gas, insurance, and more.
Personal Finance: Discuss Investments and Interest
Another thing to start introducing your children to is the concept of investing and interest income. The main point is that saving money isn't merely for spending later on or for a rainy day fund. Instead, saving money is a way to increase your income. Via suitable investments and accounts, the money your children save can help them make more money.
In wealthy people, capital income often accounts for a large portion of their overall revenue. In poorer people, wages are often the most significant portion. Work is essential, but so is knowing how to have your money work for you.
Introducing investments and interest is also a great segway into planning for retirement. For UK residents, that means opening up ISA and SIPP accounts. For US residents, that means discussing the value of having and contributing to a 401(k). Other countries have similar retirement accounts.
Retirement is a long way off for children and teenagers, but once they start in the workforce, the sooner they start saving for it, the more likely they'll be successful at having enough when the time comes to exit the workforce. Too many people begin saving too late, which is an uphill battle.
Discuss Wants and Needs
Last but not least, discuss the difference between wants and needs with your children. There's only a finite amount of money and a nearly infinite number of ways to spend it. To be successful at managing it, you'll need to reserve your money for everything you need and then spend some of it on things you want. Spending solely on necessities isn't much fun. Conversely, spending exclusively on things you want will quickly leave you in a considerable predicament.
When discussing examples of wants and needs, consider giving obvious examples and not-so-obvious ones. For example, food is a need, while a new video game system is a want. You can survive without a new video game system, but you cannot survive without food. That's obvious. What might not be so obvious is choosing an apartment. You need an apartment but do you need the penthouse apartment? Probably not. That's also obvious. But, what about spending an extra £100 a month for an apartment that's in a slightly safer part of town? Is that a need, or is that a want?
Sometimes the answers aren't so clear, and we have to use our judgement and knowledge to figure out what is and isn't a dealbreaker with our money. Some people might look at these apartments and spend the extra £100 in a heartbeat if it meant being in a better part of town. Others might look at the same flats and decide that they feel fine in the cheaper one and would instead use the extra £100 for some nights out on the town.
Everyone is different, and helping your child develop their sense of what they need and want will help them make these types of judgement calls in the future if money ever becomes tight.
Teach Your Children About Personal Finance
The above tips are some of the ways you can help your kids begin to learn about money. Teach them first about what money is and what it represents. Next, go into the concepts of spending, saving, and earning money. Discuss that earning money isn't just about working a job – people can make money through investments, rental properties, bank accounts, and more. Make a budget (even if it's a simple one), and then discuss wants and needs to help your children navigate what they need to spend money on versus what they want.
Suppose you do these things and take an active interest in showing them about personal finance. In that case, you'll be giving them an invaluable lesson that will make their transition to adulthood infinitely easier. Indeed, as they get older, they'll thank you for giving them the tools they need to be financially stable and secure!