Money offers tremendous potential, and the education we provide children about how to use it will impact the rest of their lives. In our article "Teaching Your Children Well—Basic Financial Education," we discuss basic financial concepts you may wish to discuss with your younger relatives to help ensure money’s impact is positive. This article focuses on three ways you can help a child build the foundation of awareness, values and skills to enable them to make wise money choices:
Earning and handling income
Providing an allowance to children as young as five years old teaches responsibility and delayed gratification. Rather than just handing out money, use an allowance as a springboard to discuss spending, saving and giving. Saving, and delayed gratification, can be hard concepts for young children to grasp, so it is important to encourage them. Combining an allowance with gift money can help demonstrate the power of saving and spark conversations about the value of money.
Teens with a paying job are well positioned to learn about money management, spending and saving for retirement and taxes. Wages better prepare them for the adult world and allow you to discuss withholding and saving for a large purchase (like a car or college spending money). Make sure you help them with their taxes—they will learn a valuable skill they need for the rest of their life, and will help plan for taxes appropriately.
The Henry J. Kaiser Family Foundation tells us that, on average, American kids see more than 40,000 commercials a year. Because of this barrage of marketing messages, children need guidance to make good buying decisions. Children need to be taught to view commercials skeptically, to determine if a product will do what the commercials say and if there are alternative products available that will do a better job, cost less or provide better value. Remind them that if something sounds too good to be true, it usually is.
By explaining that you won't buy them something every time you go to a store, you can lead children into thinking carefully about the purchases they do want to make. Set parameters and discuss with your children how they may use their allowance and savings, then set aside one day a month to take children shopping for themselves. This encourages them to save for something they really want rather than buying on impulse. Teach them how to plan purchases in advance and make unit-price comparisons. Show them how to check for value, quality, reparability, warranty, and other concerns. For larger purchases, consider making an agreement with them to match whatever they save.
Encourage children to use common sense when buying. This means doing research before making major purchases, waiting for the right time to buy, and using the "spending-by-choice" technique, which involves selecting at least three other things to spend money on, setting aside money for one of the items, then making a choice of which item to purchase.
Create a balanced budget
Providing a financial education will provide greater financial independence and more fiscal responsibility. As older children generate more expenses over time, their extra income can be used to cover some of their costs. Discuss a budget with them to ensure they have enough to meet their spending and savings goals. If they will be in the black, you can encourage further saving or charitable giving. If the results show they will be in the red, however, you can create a plan together to discuss expenses as needs vs. wants and address any shortfall.
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