In last week’s blog, I outlined 13 best practices for teaching kids about money that I recommend to my clients. In this week’s blog I’ll discuss when it’s time to introduce certain concepts and practices as well as outline some valuable allowance tips for parents and important things that each age group should know.
Teaching Goals: Money recognition and identification, needs versus wants, value of money
A fundamental building block to understanding money begins with a simple recognition and identification process. You’ve probably noticed that until a child learns the value of each coin, they’ll almost always choose the one that is largest in size. Step one is to teach them the name and value of each. Play “store” together using real money. Let the child practice handing over the money and determining how much change to expect. This is a great exercise as it teaches them that all “things” cost money and it creates an opportunity to discuss the difference between wants and needs.
Ages 6 – 9:
Teaching Goals: Saving money, concept of bargain shopping, allowance, prioritize, charity
Once your child begins to understand the value of money and the difference between needs and wants, it’s time to teach them about saving, prioritizing and gratification. Start by giving them an allowance. Start small and simple and help them allocate their money between charity (10% of total) and equal remaining parts to fun money, short-term savings and long-term saving as discussed in last week’s blog. Remind them what each category means.
Pay their allowance on a regular schedule such as every Friday. Let them decide whether to spend their “fun” money or save it for a later date, this allows them to feel some control and instant gratification, if they so choose.
If they want to spend their short-term money on an unplanned item, remind them what the money was set aside to cover and the consequences of them spending the money now. For example, if there is an upcoming birthday party for a friend and they spend the money on something other than the gift, they won’t have a gift to take to the party. Ultimately, let them decide what to do and do not rescue them if they choose unwisely. Arriving empty-handed at the birthday party might be the best lesson in teaching them priorities.
Spending long-term savings for unplanned items is always non-negotiable in my book.
Ages 10 – 13:
Teaching Goals: Budgeting, Compounding Interest, savings account, join in family budget discussions, encourage earning money
By now your child should understand the value of saving and prioritizing money and be fairly comfortable allocating money between the various categories so it’s time they learned about budgeting. Start this is by explaining the concept of budgeting and perhaps bringing them in on some family budget discussions so that they can see it in practice. Help them establish a written budget of their own that includes their allowance and the agreed upon expenses items that the allowance is to cover. This is a great time to encourage them to set short-term savings goals for purchases such as an iPod, a new video game, or a coveted pair of high-priced sneakers. Help them estimate how much each item will cost so that they can see how long they must save to accomplish their goals. Start simple, maybe with just a six month budget.
Along with budgeting, teach them the concept of compounding interest. Opening a savings account, if they don’t already have one is a great way for them to see the concept in practice. It may also be helpful to show them an example of compounding over a several year period. Ideally this motivates them to earn and save more.
Encourage them to look for ways to earn extra money. Teaching them the value of working for money helps build responsible characteristics and prepares them for work in the future.
Ages: 14 – 18:
Teaching Goals: Advanced Budgeting (on their own), Checking account, working, credit/debit cards, planning for college/moving out, reading about money/business, stock market
By this age, your teenager should be fairly-well versed in budgeting and over-all good money management. It’s time to let them budget on their own and just check in, or audit, periodically to make sure their on track with their budget and financial goals. It’s especially important to start conversations about their long-term goals such as going to college or plans for moving out.
It’s also time to open a checking account, learn how to reconcile a bank account and seek a part-time job, maybe at a local grocery or department store; all things that parent should be fully involved in initially and scale back once the child demonstrates competency.
All of these lessons will pay great dividends, not only for raising a financially literate child but it also helps to support your retirement plans too!
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