Money affects almost every aspect of our lives. But most of us pay little attention to financial skills that could make our lives easier down the road. According to the Federal Reserve, the student loan debt has more than doubled in the last decade. On average, an American household owes $8,398 in credit card debt. Our own finances might be a little messed up, but we want the best for our kids. And the first step in that direction is to teach them some valuable money lessons and habits that will help them throughout their lives.
Most parents think it’s too early to talk about money with their children. But according to a study conducted by researchers at the University of Cambridge, children start forming money habits when they are just 7 years old. You don’t want your child to learn important money lessons the hard way in the future – maxing out their credit card, spending way more than they earn, and getting into a huge student loan debt.
Some smart parents start teaching their children about money the moment the kids learn addition, subtraction, and other simple concepts. The best way to instill financial skills in a child is through your own actions. Children are constantly observing their parents. How you deal with money and talk about it will form their perception of money.
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You can also teach them good money habits through stories, fun games, and by talking about it with them or in front of them. How you convey the message depends on the age, behavior, routine, and the friend circle of the child. Nobody knows your child better than you do. So it’s up to you to decide how you want to go about it.
These are the top 10 money lessons you must teach your child
10- Charitable giving
We are all human. Some of us might be blessed with a little more than others. If we have enough in emergency savings, food to eat, and a roof over our head, we should put things in perspective by encouraging our children to help someone in need. Have your child donate a small portion of their allowance to a church, charity, or person in need.
Over time, philanthropy will have a huge impact on your child. It will make them realize that the money can be used to help someone instead of buying a new toy.
Your little child doesn’t need to learn all the complicated details of tax filing. But it could be real fun to see their reaction when you show them how the government is going to take a large portion of their income for the rest of their lives. If you have a teenage child working a part-time job or running a business, you’d want to teach her how to file taxes and save all the receipts.
The IRS has a dedicated section on its website for students to teach them the basics of taxes.
8- Making money
‘Money doesn’t grow on trees.’ We’ve all heard it a million times. But what does a child see? They see their parents buying all kinds of stuff by magically swiping a plastic card. They see dollar bills popping out of ATMs. You can’t blame them for believing that money is an infinite resource that their parents can magically pull out of the ATM or by swiping a card or tapping on the smartphone screen.
Explain to them how you work hard to make money. Even better, instead of giving your child allowances, pay her commissions for doing small jobs around the house. Teach her that the bank plays the role of a Saving Jar. You are able to buy a $5 toy because you first worked to earn $5.
7- Difference between needs and wants
In a post titled Financial Advice for My New Son, noted financial writer Morgan Housel says “I hope you’re poor at some point.” At first glance, it seems weird for a parent to wish something like that for his child. But Housel notes that you can’t learn the value of money without feeling “the power of its scarcity.” It’s the lack of money that teaches you to differentiate between needs and wants.
Figure out a way to teach your child that food, clothing, basic education, and shelter are needs. Everything else is a desire. Wants are nice to have, but they should not replace needs as priority in your budget. If the child has only a limited amount of money, encourage her to use it for what she needs.
Budgeting is a habit that must be formed in the years. It’s one of the most important money lessons you can teach your child. Encourage her to set different goals and use clear jars to for each goal. It’s important to tell her what she is saving money for. Every now and then, she will put some money in each jar and see it grow over the next few days or weeks. Once she has enough money in a jar, she can use it to buy what she wanted.
It also makes sense to invite them in the family budget discussions. Children observe how their parents handle the bills, taxes, investments, and other financial issues. Over time, they will start thinking about their own spending and budgeting.
5- Delayed gratification
Instant gratification feels rewarding, primarily because you get what you wanted right now. You don’t have to wait for weeks or months. Teach your kids how impulse purchases can drain their money fast. Instant gratification could also lead them to a heavy credit card debt in the future if the habit goes unchecked.
When the child likes something in the store or online and wants to buy it right now, ask her to wait at least 24 hours before making that purchase. If they have enough money saved and they have thought through it, they can buy it after a day. The ability to delay gratification will have a huge impact on their long-term financial success.
Is this really an important money lesson? Yes, absolutely. Ads on TV, billboards, the Internet, and other places influence people’s buying decisions. According to researchers, the time spent watching TV has a direct impact on what and how many items children ask for at the grocery store.
Every once in a while, explain how a company’s sales tricks get us to buy stuff we don’t need. It’s important to develop a healthy skepticism in your child. In the long run, it will help them resist the temptation to fall for the messaging or branding of a product or company.
3- Importance of credit scores
Credit scores play an important role in our lives. And parents want their kids to start with a strong credit score. Talk about credit score to your kid. You might want to make them an authorized user on your own credit card or get them their own card with a small credit limit. Encourage them to pay it off in full every month. You’ll need to guide them along the road, teaching them the importance of credit history and timely payments.
3- The menace of debt
Your child doesn’t yet know the difference between good debt and bad debt. Getting into debt has become easier than ever before, thanks to credit cards and lending apps. Borrowing – especially bad debts such as credit card debt and payday loans – is one of the biggest causes of financial problems. Debt is the modern form of slavery.
Teach your child to monitor her spending habits, and spend only what she has. If you have a teenager, talk to her about how she will pay for college. Student loan debt should be the last option for funding her education. Talk about part-time jobs, scholarships, community colleges, and in-state universities to minimize or eliminate student loan debt.
Maybe you could lend your child some money, which she has to pay back over time with interest. It will make her realize how interest payments could add up. Show her the numbers.
Once your child is old enough to understand this, show her the magic of compounding and how it could help her grow wealth in the long-term. Head over to Investor.gov to show her how starting at an early age could dramatically multiply her money using compound interest. It also shift’s the child’s focus from short-term to long-term goals.
Teaching money lessons to your child will require constant and conscious effort on your part. Maybe the process will even help you to change your own bad money habits. Just make it fun.