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Teaching Your Kids about Money, Part 1

Tackling this issue is on the forefront of agendas for many non-profit and financial institutions alike but as we noted last week, parents are the key to helping put our kids on track for a brighter financial future.

Possibly the most important thing we as parents can do to help is model sound financial behaviors ourselves but along with this we can teach them through discussion and practical experience.

I recommend the following approach to my clients.

  1. Discuss the difference between needs and wants with your kids. As easy as it may sound, many financial issues can be avoided by simply understanding that it is merely impossible to have everything you want – some things are just more important than others.
  2. Teach your kids how to prioritize. Prioritizing can help in managing money and with many other day-to-day decisions your child will face.
  3. Help your child understand that there is no “free meal”. If your child wants something, help them earn and save money to purchase the item without going into debt.
  4. Teach your child the value of working for money by encouraging them to get a job; it can be as simple as doing chores around the house, babysitting for a neighbor or sacking groceries at the local market.
  5. Help your child learn how to create and live on a budget either by working together to create an individual budget for them or by including them on the family budgeting process.
  6. Give the child a personal allowance not tied to action such as behavior, chores or grades. If the child wants to buy something not in the budget, let them make their own decision to use their allowance to either buy it now or save for it. Remind them that if they spend the money, that money will not be available in the future for other things they may want.
  7. Be patient with your child as it may take a while for them to understand that once the money is spent, there is no money left for wants. Resist the urge to rescue them – stick to what you’ve taught them about wants versus needs and about budgeting.
  8. Offer advice to your kids but let them make their own decision. Often the best lessons in life are those learned from mistakes.
  9. each your kid to save and budget all of their sources of income, including gifts, and the earlier you teach this, the better. A good rule of thumb is to first allocate 10% off of the top for either tithing or for charity if that is your practice; divide the remainder into three-parts: fun money (immediate), save for at least one week(short-term goals), and save for college or to move out (long-term goals). Explain the meaning of each; for example: “fun money” is for their unplanned wants like candy or a movie with friends, “short-term” savings is for planned items in the near future such as a birthday gift for a friend’s upcoming party, a new bike or spending money for summer vacation, and long-term savings is for planned items that will occur in the distant future, like college, a car or for moving out when the time comes. Be sure to stay involved with your kids along the way but as they age and mature in the process taper your guidance as appropriate; for example, an elementary school-aged child might need to be reminded about an upcoming birthday party or a teenager just beginning to drive might need to be reminded to budget for gas or an upcoming insurance premium but should already know to budget for a gift for a friend’s birthday.
  10. Teach your kid how to make their dollars stretch by showing them how to comparison shop at the grocery store or by using coupons or shop for items on sale.
  11. Let your child practice handling money by letting them hand the money to the cashier or a bank teller.
  12. Help your kid establish and learn to reconcile a checking and/or savings account. Jump$tart research found that students with bank accounts scored higher on financial literacy tests than those without an account.
  13. Most importantly, practice what you preach. Kids learn more from watching parents apply these good financial behaviors than they do by just hearing them.

Wondering how to determine when it’s time to start teaching your kid these lessons or how much allowance is appropriate? Catch next week’s blog for a good timeline rule-of-thumb, valuable tips for parents about allowance and important things each age group needs to know.


DISCLOSURE: Investment advisory services are offered through Gretchen Stangier, Inc. DBA Stangier Wealth Management (“Stangier Wealth Management”), an investment advisor registered with the U.S. Securities and Exchange Commission. Stangier Wealth Management only offers investment advisory services where it is appropriately registered or exempt from registration and only after clients have entered into an investment advisory agreement confirming the terms of engagement and have been provided copies of the firm’s ADV Part 2A brochure and Part 3 documents.

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