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Children should be brought up to understand what money is and learn the benefits of saving and spending wisely. Here are some tips to help you to teach your children what money is and how it can be both a blessing and an anvil around their necks depending upon how they handle it.
A. Young Children
1. The Cost of Everyday Items
When children are able to count, teach them how to count using money. Teach them the difference between the various coins and denominations of bills. Show them how much money they need for everyday items: a Hershey bar, gum, pencils and other things they use every day.
2. The Advantages of Saving
As they grow older, explain how their allowance would not be enough to buy them something expensive, such as a watch, bracelet, football or their own cell phone, but if they saved a certain amount each week they could afford what they wanted after a period of time.
In other words, teach them what saving means and why they shouldn't spend all their money right away. You could keep some allowance back for them as 'savings' and pay them 'interest' on it, teaching your young children how money can grow if they don't spend it immediately.
3. Money as Earnings
Many families pay their kids for carrying out chores. Washing dishes, tidying their rooms and helping mom with the shopping. Many regard this as a form of reverse blackmail - you don't get pocket money unless you help with the chores. You can overcome that by giving them a basic weekly allowance, and then extra according the work they do during the week.
Those that don't work so hard will soon see that their siblings that do are earning more allowance then they are. You could also 'save' that extra money for them, or a proportion of it, until school camp, the holiday period or to spend on their summer vacation.
Including the saving aspect above, you can show them that by not spending $50 of their earnings, but saving it, they get $55 from you, or whatever seems a reasonable interest rate. You might even agree to match what they save so they in effect get 100% interest.
4. Explain Household Expenses: The "Cost of Living" Concept
Explain your own household expenses to your children once they have a rudimentary understanding of budgeting. Explain why you need to save for utility bills, rent or mortgage and insurances. How there are fixed financial commitments such as these, and then the everyday expenditure on food, clothing, travel and other expenses. Let them understand that everything has a cost, and it is important to have enough money each month to meet the fixed costs before you can take them to the cinema, ball game or McDonalds.
B. Older Children
Up till a certain age, you will have looked after your children's savings yourself, and exerted a high degree of control over their spending. As your children grow older and have a rudimentary grasp of what money is and how it can either be spent or saved until they have enough for something they really want, you can teach them the responsibility of looking after their own money.
They will gain an understanding of banking, investment and the importance of living within their means - not spending more than they make or receive. Here are some ways of teaching your older children, who are in effect young adults, the importance of budgeting and using credit properly.
1. Open a Bank Account
Once they are old enough, open a bank account for them. You will be responsible for maintaining it and will have to authorize their withdrawals until they reach a certain age, but by doing this you will make them feel 'grown up' and responsible for their own money - even if it is a weekly allowance, or 'pocket money', paid into their account.
Explain the concept of interest again, and how they make money by keeping their cash in the bank and not spending it.
2. Make Them Responsible
When they want to make a withdrawal, never refuse, but discuss it with them and eventually agree to them making the withdrawal. If they spend all their money too quickly, then that is as good a lesson as saving it all. Allow your kids responsibility for their own money, BUT - also make them responsible if they spend it too soon.
This is particularly true if you have other children who have saved for a weekend camp for example. They will be miffed if you give the spendthrift money when they have saved up for it. That's just an example, but you get the idea!
3. Teach Budgeting
Take your children shopping with you, and show them how some items cost more than others. If they want their own portable DVD player, show them the cost and relate that to their allowance - how much do they have to save for how many weeks? Offer to meet a percentage of the cost if they save the rest.
4. Explain How Credit Works
Show your children your credit cards and how they work. Let them see you use them in stores, and then show them the bills when they come in - that impresses on them that everything must be paid for. Also show them the interest payment, and explain that is the cost of borrowing money.
5. College and Credit Cards
It is important that your children grow up with an understanding that credit costs money, but that sometimes it can be worth it if the item purchased is important. Once your kids are ready for college, explain the importance of using credit cards only when necessary, unless they have enough saved to cover the monthly bill. Explain interest, charges and what happens if they only pay the minimum amount.
Finally...
Take some time on a regular basis to discuss financial matters with your children. You could have a general meeting when you all discuss interest rates for borrowing against saving, and the different ways they could save. You could also follow that up with personal discussion with each of your children separately regarding their own finances. How much they have saved, and how much interest they have earned. Discuss how much it costs to borrow money for things they want compared to the cost if they saved for them instead.
There are many ways for you to teach your children about money, household finances and how to look after their own costs of everyday living once they leave the nest. Whichever way you do it, you should be sure in your own mind that your kids have at least a reasonable knowledge of how to look after their own finances that will enable them to start off living their own lives with good background knowledge of household finances and the relative benefits of borrowing and saving.
For more information on many aspects of financial knowledge for individuals and businesses is available from Michelle Jones, Managing Partner at B & M Financial Management Services, LLC visit http://www.bmfms.com where you will also find information on how to run a successful small business.
