Posted on: 27-01-2015 in Finance
Besides the increased household expenditures and the need to save for college, being a parent involves another big task – introducing your children into the world of money. The concept of saving and compound interest, understanding financial products, budgeting, financial responsibility and the dangers of excessive debt – are all essential survival skills in modern society.
They won’t learn it at school
In most countries, you can’t rely on schools to teach your kids about money. Even if the basics of personal finance are covered at some point of the curriculum, simply learning about money like history or literature is not enough. It requires a much deeper level of understanding and internalizing the concepts. Habits need to be developed. As parents, you are the only people who can effectively help your children develop them. Needless to say, it is a very long term process.
A common question asked by parents is the optimum age when to start teaching kids about money. The answer is that it’s (almost) never too early and never too late. The format must, of course, be tailored to the kid’s age.
Things aren’t free
Children as young as 3 or 4 are ready for the information that money exists. Take them shopping with you and try to get them interested and actively involved in the process. It will become easier and more fun as soon as they learn basic mathematics and can compare prices. When they get older, you can send them to do simple shopping on their own and perhaps let them buy something small (like chocolate) as a reward.
There are different opinions on the best age when to start giving your children an allowance and how much. Give them freedom regarding how they spend it. The objective is to let them make their own financial decisions and even make some mistakes while the risk and the amounts are low. At the same time, encourage them to put a little aside every time and save for a bigger item they want, like a more expensive toy or sports equipment.
At this stage, you can also take your kid to a bank and open a children’s current or savings account. Banks understand that children are attractive as future customers and therefore their terms on children’s accounts are often quite favourable – no fees, no minimums and sometimes even a higher interest rate. Although it is a bit harder these days with interest rates nearing zero, it often helps when the kids see the interest added to their balance on an account statement.
If you have done it right up to this stage, the initiative will now gradually shift from you to your teenage children. They might be interested in working for a weekend or summer job to increase their income. They might also explore more advanced financial concepts such as insurance or investing.
Although credit cards and consumer loans are typically not allowed until adult age, make sure your children understand the dangers of debt and are prepared when the banks and other companies start to attack them with their marketing.
Leading by example
At any age, the best way to teach children about financial responsibility is by giving them a good example – being financially responsible for yourself.