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Kids learn money management lessons from their parents at a very young age. In fact, children as young as three years old understand that you exchange money to buy things. As they get older, our kids need to understand how to manage their money to live a happy and successful life. But with so much bad money advice out there, what are the right money lessons parents need to teach their kids? What money lessons for your kids are most important?
Now that I have a teen in the house, I’m bombarded with a huge list of “I want this” or “I need that” every day. And to think I used to think diapers were expensive. Now, I’m paying for name-brand clothing, supplies for school projects, electronics, and food to feed her and all her hungry friends that come over to hang out. Not to mention the cost of Christmas and birthday gifts has risen exponentially, year after year.
As parents, we must draw the line somewhere. Instead of resorting to saying “I’m broke” or “we don’t have the money,” we should transition into using these moments as teachable moments. It’s our responsibility as parents to teach our kids about money. But where to begin? Start with these six essential money lessons kids need to know.
1. How to Make Money
As an advocate of letting my child earn a commission instead of handing out an allowance, teaching kids how to earn money will help them understand the value of money. Next time, instead of handing out money to your kids, give them the opportunity to earn it.
Setting up a responsibility chart (or chore list) is a good start. You can even let them help you pick the chores they do! Once they’ve completed their tasks and you’re ready to pay them, ask what they plan to use the money for and offer tips on saving money for bigger goals.
2. Eliminating Greed
Since our attitudes about money, among other things, are formed at an early age, teaching a lesson on how giving our money makes a difference in the lives of others will send a powerful message. Whether it’s a savings jar to donate to a local charity they care about or saving up to buy a gift to give a sibling or classmate, they’ll learn the gift of giving and won’t fall prey to being greedy.
3. Saving for a Goal
Money isn’t always something you either have or don’t have. Often, you have money set aside for a specific goal and, because that money is earmarked for something else, you can’t spend it on a shiny new toy for your child (or going out to eat when you’re too tired to cook).
Teaching your kids how to save for something specific teaches them discipline and the art of delayed gratification. It also shows them that money doesn’t appear and disappear randomly and that they can have some control over how money is spent.
4. Needs vs. Wants
As an adult, I sometimes have a hard time separating my needs from the things I want. Satellite radio? Surely I need that, right? Sadly, that falls squarely in the “want” category and it had to go. Making the decision on what qualifies as needs versus wants is an essential lesson that your child must learn early.
Understanding the real difference between a need and something they want will set them up to make better money decisions in their adult life. And, like saving toward a goal, it will teach them about delayed gratification and curb their impulses.
5. Borrowing Money
I can’t count the number of times my teen left her money at home only to find something she “had to have” at the store, leading her to ask me to borrow money. She always follows the request with “I promise to pay you back when we get home.” Instead of saying yes right away, use this as an opportunity to teach your child about loan payments, interest, and opportunity cost that comes with having a debt to pay.
Yes, this is a complex topic but it’s one most kids need to understand before reaching high school. When my daughter was younger, I’d offer to let her borrow money for a flat fee of $1 as an “interest” payment. Now that she’s older, I suggest a percent of the total amount she wants to borrow. Once your child has a basic grasp of how to responsibly borrow money, the knowledge will serve them well throughout their lives.
6. Pay Yourself First
As our kids get older, they’ll need to understand and take advantage of compound interest. Starting with their very first paycheck, they should set aside money towards a big savings goal, retirement, or any bills they might have to pay. Teach them to do this first because, as we know, there won’t be anything left if they wait until the end of the month.
These six money lessons are really part of a bigger mission. How you spend your money is a reflection on your values, and when kids learn to align their values while making spending decisions, it’s easier to understand when to save and when it’s okay to spend money.
Teaching your children to be reasonable with their money shouldn’t make you nervous. It’s a life skill they need to have, no different than eating with a spoon or brushing their teeth. As a parent, it’s our responsibility to instill these concepts in our kids. How do you teach your kids about money?