How to Teach Your Children Fiscal Responsibility
It’s never too early to teach your children how to be financially responsible. From setting up an allowance, to teaching them how the stock market and even how retirement plans work, it’s good to get them thinking of age-appropriate questions about the future of their financial health. Whether they are in elementary school and only have basic math, or are packing for college with few budgeting skills, now is the time to sit down and explain personal finance.
First, teach your child that they may have to wait for something they want. While credit cards will come later, it’s important to show them that saving up and paying, instead of buying on credit and paying later, is financially better. While instant gratification seems to be what is more popular these days, delayed gratification must be taught in a financial context. This will come into play later with compound interest.
For now, however, assign small chores to your child. Have them pick up the toys in the room. Set the table. Make their bed. At the end of the week, give them an allowance. Give them denominations that encourage saving, such as five $1 bills and — if you are feeling generous — a single $5 bill. The goal is to show that money does not come from thin air; it takes work. Money in the bank is not an endless supply; the credit card is not supplying free money. This is a concept to come back to when teaching about credit cards.
Goals, Wants, and Needs
Next, set a goal. Whether it’s buying a Barbie or GI Joe, let them see the price and start saving. Use a jar to keep a portion of their allowance for that specific toy. When they have enough money saved using a percent of their allowance, it’s time to buy.
As part of this, you want to teach want vs. need. This will make them more pragmatic in decisions later in life, ultimately saving them money when they know to spend on things they need first, and things they want second.
Introducing advertisements, and evaluating the ads, can help your child understand that companies want your money. Is the price of the product fair? Is there another, similar product for less? Does the product work as advertised? Is it too good to be true? This will also help your youngster think logically and pragmatically.
Finally, teach your child about credit cards. Everything from what credit is to how interest works to how to use a credit card correctly should be covered. In short, having a revolving payment, preferably less than 30 percent of the credit limit, will build credit, but accrue interest. Paying off the entire bill each month is financially sound, but is not a good avenue for building credit.
Reiterate this is not free money. It will need to be paid, and the later it is paid, the more interest is added on, meaning they pay even more. Far from free money, debt can pile up quickly, especially if your child only pays the minimum per month. Instant gratification is not worth continually swiping the card and neglecting to pay.
As your child transitions to being a teenager, they will start to use these teachings more and more. When they are a tween or teen, it’s time to introduce them to compound interest. You likely have experience with this yourself; you know the power of compound interest, and likely started saving in your 20s. Starting your child even earlier will see even greater dividends.
To this end, by now, you’ll want to have a bank account open for your child. Starting an investment portfolio can help for compound interest, using a retirement fund.
Paying the Bills
Before they head off to college, it’s time to revisit the need vs. want point. Everything costs money, from food to clothes, cell phones, the internet, transportation, housing, school, dating, and their health. While you may have paid for most of their expenses, as they leave the house, that burden falls to them.
They may already have a part-time job, where most of that money goes into the bank as expendable income. Perhaps they pay for a car and insurance. They might buy their own food. But they are unprepared for most of their paycheck going towards bills, such as utilities.
If they have been saving, they may already have a rainy day fund. Teach them that, even if they do everything right, something beyond their power may happen. A car malfunctions. A stove stops working. They get hurt. Unexpected expenses will pop up, but with the help of the above points, they should be well prepared to deal with it.
Finally, utilize this excellent resource with worksheets for planning a budget, including needs and wants, as well as a few practical activities such as filling in a check.
If your child does not have an emergency credit card, preferably linked to your account, consider student credit cards, which will also help build credit. Want more information on credit cards? Visit our credit card learning and resource center for more guides. For more on the “credit” part of credit cards, and how your children can start building their credit, visit our credit score resource and learning center for guides.
Teaching your children the value of personal finance, planning, and budgeting before while they are young will pay them dividends down the road, possibly giving them a better retirement than your own. Either way, they will thank you for the knowledge and fiscal smarts you impart.
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A former newspaper journalist, Cole spends his free time reading, writing, playing video games, watching movies, and learning about every subject under the sun. He lives with his wife and daughter in Idaho. Follow Cole on Twitter: @ColeMayer42