As parents, we have one of the most difficult jobs on the planet. Not only are we responsible for preparing our children to do well in school, show respect and be self-reliant, but we are also expected to model the behaviors that will help them thrive in the future.
Helping them develop healthy financial habits is certainly no exception to that rule.
Thankfully, there are a number of practical ways to teach children the value of a dollar, and put them on the early path toward financial success.
Here are a few that we believe are the most important to instill in the next generation.
No matter how you plan to teach your kids about money, you will want to start early. Even young children can learn the concept of scarcity and anticipate being without resources.
For example, my 4-year-old son loves bananas and likes to have one every morning for breakfast. Occasionally, he’ll even ask for one as an afternoon snack.
When there is only one left in the afternoon and he wants it as a snack, I let him know that this is our last one. If he eats it, he won't have a banana in the morning. If he still chooses to have it, it's important to bring that event up again in the morning.
The key here is once you say that there won't be something at a future date, you have to stick to it. They have to experience the negative consequences of their choices.
Done correctly, this is a simple and effective way to help them begin to see the value of things, and understand that their resources are limited.
Bring Them Into the Conversation
Parents have a tendency to hide their finances from everyone, including their own children.
While you may not want to share every last detail with your kids, it is important to bring them into the conversation, especially when it comes to family budgeting. Feel free to discuss things like the family’s weekly or monthly grocery budget.
For example, the family has X amount of money left to spend on food and groceries this week, so you will have to wait until next week to go out to eat.
This is also a great way for you to introduce the concept of savings. You can say that, in order for the family to take that beach vacation this summer, you must set aside X amount from every paycheck going forward. This will help your children understand the importance of budgeting and the benefit of saving effectively.
A Great Idea for Handling Allowance
Giving your child an allowance lays a foundation for their understanding of financial planning.
However, without some education about money, most children will immediately spend their funds on the first thing that catches their eye. This is where you have the opportunity to be a positive example for your child.
We need to consistently let our children see us, as parents, make decisions to NOT purchase something. This opens the door for more complex discussions about the differences between wants and needs, and the rationalization for putting that “want” back on the shelf.
Be a model of good financial habits, and let them see and remember the moments when we could have acted on something but showed restraint. Tell them it's not that bad! Let them know that you're still happy even without the object of desire.
Finally, you should remember that, if you do choose to give your child an allowance, you should encourage them to divide their funds into categories. For example, you might encourage them to follow the “three-bucket” formula, popularized by author Ron Lieber in his book: The Opposite of Spoiled, where every time they receive money, they set aside some for “Spending,” “Saving,” and “Giving.”
The spend bucket can be used for immediate gratification, but the "save" bucket teaches delayed gratification through discipline. Make sure they can physically SEE the money growing in their account and help them establish goals they can celebrate when they get there.
The "giving" bucket helps your child learn to be generous with their resources. Make sure they get to deliver the funds themselves. The psychic reward of generosity helps set a great foundation for their character as they mature.
Helping your child develop healthy money habits while they are young is one of the best things you can do for them as a parent. Giving them the building blocks at an early age will allow you to reinforce increasingly complex lessons as they grow and ensure that they become financially responsible adults.
I’d love to hear from you! What steps are you taking to instill positive financial habits in your kids? Let me know in the comments.