You are using an unsupported browser
Please switch to a supported browser so you can get the best experience on this site
According to recent surveys, half of US adults lack financial literacy. Unfortunately, such a vitally important skill is typically not taught in schools. And in the absolute majority of cases, parents are the ones responsible for passing the knowledge over to the younger generation.
An understanding of personal finance can have a great impact on the child’s life. If you manage to do a great job, your kid will grow up to be a financially independent, successful human being who understands what to pay attention to when making any money-related decisions.
However, teaching financial literacy is more than simply giving the children a list of rules. You would also want to make sure that your kid has the right financial mindset, and that, of course, will require some time and effort. Below, you will discover plenty of tips that will help you effectively teach your children how to build and maintain a financially stable future.
Key Takeaways
Here are the five most important lessons to teach your children. You can consider these the non-negotiables.
Earning money and handling money is important to understand for your child's financial success. Let's review the concept based on age.
It is incredibly important for children to have their own money as only in such a way they will learn to make spending decisions.
Kids are typically impulse buyers. And while you should teach your youngster to distinguish between “wants” and “needs”, the little one should be able to purchase something fun every once in a while.
So, what you can do is introduce a one-day cooling-off period before making the purchase. You can also encourage the child to calculate how many hours he would have to work to be able to afford the item. If the urge to buy the special something doesn’t go away and there is no cheaper alternative available, the purchase might be worth it.
Budgeting is, perhaps, the most essential skill every individual should pick up. And the sooner that happens, the better.
Whether your kid is already earning his money or is receiving an allowance, you should introduce the little one to the concept of budgeting. For example, the child might have three jars for saving, spending, and giving. With older kids, you can go the extra mile, and tell them more about your own budget and how much money is needed to cover utilities, groceries, and so on.
There are also plenty of cool budgeting apps for kids that you might want to check out:
Encourage your children to begin saving at least 10-15% of their earnings. It’s important to set up a savings goal, so make sure your kid understands what he’s saving for.
To make the process more fun, you can create a diagram that will help track the progress.
Teenagers can be introduced to the concept of an emergency fund. The money that they set aside might later on be used to fix a broken smartphone screen, for example.
This is one of the additional topics to discuss when setting children up for financial success. As practically no one manages to avoid accumulating at least some debt, you would have to make sure that your child understands the basics of how it works (including all the risks of borrowing, of course), those are:
If you are looking to make a difference right now, here are some relatively simple actions you can take no matter your child's age.
Individuals can open their own bank accounts only once they reach the age of 18, but you have the right to open a custodial account which is the property of the child that is currently managed by an adult.
It is a great idea to open an account as soon as possible with a savings account being one of the best options. Some of those have no minimum balance requirements, no monthly maintenance fees, and offer a high APY.
The kid can contribute money from his earnings to the savings account, and you might decide to also save some cash that the child gets gifted.
You need to come up with a realistic plan of how you’re going to help your child get through college.
The earlier you start the financial planning journey, the better as you need to have at least a few years to adjust and strategize. An advisor will help you discover everything you need to know about scholarships and loan options so that your kid manages to make the most of the experience without breaking the bank.
You might want to contribute to your kid’s savings account as well. Even $5-$10 each month can make a huge difference in the long run. But whenever you can set aside a larger amount, you should do that.
Ideally, you would want to transfer the sum to the kid’s account as soon as you get your paycheck. You can even automate the payments so that you don’t have to actively think about ticking the task off your to-do list.
Ensure that your child’s savings account remains untouchable. This means that you should not deplete it, even if you are facing a financial emergency.
The kid needs to understand that not all the money that he receives should go towards spending. Explain why a part of the sum should be set aside. You might even decide to create two separate funds – one for saving (the money will go straight into the savings account) and one for giving away (this can include gifts for friends and family or charity).
Such a system will help the children learn about how important it is to give. And by saving a certain part of their income, they will learn to manage their finances.
Children should understand that money should be earned.
Here are six more lessons to keep in mind to make your kids financially successful.
You would want your kids to grow up having the right financial mindset. Becoming rich should not be their ultimate goal, they must strive to achieve financial freedom which means being fully in control of their finances.
This typically means:
Entrepreneurs have the potential to earn more than in a traditional job without having to work 9-to-5. By encouraging your children to start their own businesses, you’ll help them understand that it’s something very much achievable.
Here’s what you can do:
Once your child grasps the essentials of budgeting and saving, introducing them to the world of investing can be a powerful next step in their financial education. Investing not only teaches them how to grow their money, but also helps them understand the balance between risk and reward—a crucial life skill. By investing, they’ll learn that taking calculated risks can lead to significant gains, but also that those risks must be managed wisely to avoid unnecessary losses.
Begin by explaining the fundamental concepts of investing, such as stocks, bonds, mutual funds, and the principle of compounding. Use real-world examples to illustrate how investments can grow over time, and discuss the importance of diversifying to spread risk across different assets. This will help them see how investing can be a strategic tool for building wealth over the long term, rather than a quick way to make money.
To make the lesson tangible, consider opening a custodial brokerage account for your child, which you can manage together. Many brokers offer these accounts, allowing minors to invest in stocks, ETFs, and other securities with parental guidance.
While it’s always advisable to steer clear of borrowing when possible, it’s crucial to instill in your child a deep understanding of the responsibility that comes with borrowing money. The concept of borrowing can be a slippery slope, especially if not approached with caution and a clear repayment plan. Before your child ever considers taking out a loan or borrowing from friends or family, they should understand the potential consequences, such as interest accrual, the impact on their credit score, and the strain it can put on personal relationships.
Teach them the importance of evaluating whether borrowing is truly necessary. Can the purchase wait until they’ve saved enough? Are there alternative ways to obtain what they need without incurring debt? If borrowing becomes unavoidable, guide them through the process of borrowing wisely.
The main difference between needs and wants is the fact that you must financially take care of your needs before spending cash on anything else. Explaining the concept to a child who doesn’t need to pay rent or buy groceries can be challenging, but it’s not impossible.
For example, the next time you go grocery shopping, take your kid with you. Fill up the basket with different items and then ask the child to explain which ones are “needs” and which ones are “wants”.
The money mindset of children is typically based on how their parents talk about finances.
If you repeatedly say “You have to work hard to earn money” and “You have to get a job and work a lot to pay for your bills”, your kids might find it challenging to start their own businesses in the future as they would be subconsciously putting the brakes on every time they have a new idea. Instead, try to say something affirmative, such as: “The are plenty of money-making opportunities all around us.”
The best way to set your children up for financial success is by helping them build a healthy attitude towards money. And though they might need quite a few years to learn about personal finance, the results would be worth it.
Note: The content provided in this article is for informational purposes only. Contact your financial advisor regarding your specific financial situation.
Browse through the Blog to read articles and tips on managing debt, improving your credit and saving more money!
