Teach Your Children Well - Basic Financial EducationSubmitted by Desmond Wealth Management, Inc. on May 20th, 2016
Even before your children can count, they already know something about money: it's what you have to give the ice cream man to get a cone, or put in the slot to ride the rocket ship at the grocery store. So, as soon as your children begin to handle money, start teaching them how to handle it wisely.
Giving children allowances is a good way to begin teaching them how to save money and budget for the things they want. How much you give them depends in part on what you expect them to buy with it and how much you want them to save.
Some parents expect children to earn their allowance by doing household chores, while others attach no strings to the purse and expect children to pitch in simply because they live in the household. A compromise might be to give children small allowances coupled with opportunities to earn extra money by doing chores that fall outside their normal household responsibilities.
When it comes to giving children allowances:
- Set parameters. Discuss with your children what they may use the money for and how much should be saved.
- Make allowance day a routine, like a payday. Give the same amount on the same day each week.
- Consider "raises" for children who manage money well.
Take it to the bank
Piggy banks are a great way to start teaching children to save money, but opening a savings account in a "real" bank introduces them to the concepts of earning interest and the power of compounding.
While children might want to spend all their allowance now, encourage them (especially older children) to divide it up, allowing them to spend some immediately, while insisting they save some toward things they really want but can't afford right away. Writing down each goal and the amount that must be saved each week toward it will help children learn the difference between short-term and long-term goals. As an incentive, you might want to offer to match whatever children save toward their long-term goals.
Television commercials and peer pressure constantly tempt children to spend money, but children need guidance when it comes to making good buying decisions. Teach children how to compare items by price and quality. When you're at the grocery store, for example, explain why you might buy a generic cereal instead of a name brand.
By explaining that you won't buy them something every time you go to a store, you can lead children into thinking carefully about the purchases they do want to make. Then, consider setting aside one day a month when you will take children shopping for themselves. This encourages them to save for something they really want rather than buying on impulse. For "big-ticket" items, suggest that they might put the items on a birthday or holiday list.
Don't be afraid to let children make mistakes. If a toy breaks soon after it's purchased, or doesn't turn out to be as much fun as seen on TV, eventually children will learn to make good choices even when you're not there to give them advice.
Earning and handling income
Older children (especially teenagers) may earn income from part-time jobs after school or on weekends. Particularly if this money supplements any allowance you give them, wages enable children to get a greater taste of financial independence.
Earned income from part-time jobs might be subject to withholdings for FICA and federal and/or state income taxes. Show your children how this takes a bite out of their paychecks and reduces the amount they have leftover for their own use.
Creating a balanced budget
With greater financial independence should come greater fiscal responsibility. Older children may have more expenses, and their extra income can be used to cover at least some of those expenses. To ensure that they'll have enough to make ends meet, help them prepare a budget.
To develop a balanced budget, children should first list all their income. Next, they should list routine expenses, such as pizza with friends, money for movies, and (for older children) gas for the car. (Don't include things you will pay for.) Finally, subtract the expenses from the income. If they'll be in the black, you can encourage further saving or contributions to their favorite charity. If the results show that your children will be in the red, however, you'll need to come up with a plan to address the shortfall.
To help children learn about budgeting:
- Devise a system for keeping track of what's spent.
- Categorize expenses as needs (unavoidable) and wants (can be cut).
- Suggest ways to increase income and/or reduce expenses.
The future is now
Teenagers should be ready to focus on saving for larger goals (e.g., a new computer or a car) and longer-term goals (e.g., college, an apartment). Also, while bank accounts may still be the primary savings vehicle for them, you might also want to consider introducing your teenagers to the principles of investing.