With money being an integral part of our lives, it’s really surprising that our schools don’t teach our children enough about money. This means as parents the burden falls on you to teach your children about finances. If we want the next generation to avoid some of the common money pitfalls, then we need to start sooner rather than later.
Children need to learn how to spend and save money appropriately. The following lessons can best help your child learn how to earn, spend and save money and thereby leading them to make smart financial choices in the future.
Lesson 1: Where does money come from?
First and foremost, it is important you explain to your child about where you get money. To do this put yourself in his shoes, where does he think money comes from? They might say, the ATM or the bank, since most of the time, they hear you mention those places when talking about finances. Do not let them grow up with this assumption as they might actually believe that “Money does grow on trees”.
Here are few things you can explain to them:
- Currency denominations and make sure you show them what each looks like.
- Explain what these currencies represent i.e. a means of payment for services rendered (work) or for spending on items such as food, clothes, toys and much more.
Depending on your child’s age, you can go into as much detail as possible about how you spend your money on various expenses i.e. pay taxes, mortgages, bills, and other utilities. Note, that you should always be positive when talking about money to your child because children tend to adopt the attitudes their parents have towards certain things. Your objective here is to get them comfortable discussing the topic of money.
Lesson 2: The Miracle of Compounded Interest
Albert Einstein considered compounding interest as a strange concept, terming it the eighth wonder of the world. You will be surprised at just how many people are ignorant of what it means. It would be poor foresight to let your child grow up not knowing how KES. 1 a day can grow up to one million shillings at 10% interest rate for 56 years.
Take some time to draw a chart with your child and explain how money grows over time. Avoid acting like skeptical people I have encountered before, who lack the patience and thus are not keen on financial products that can help them save and use the returns for investing. Children are more willing to accept and less likely to look for reasons as to why it can’t work like most adults. Get your child excited about saving and investing, as this ‘eighth wonder’ could make them rich!
Lesson 3: Pocket Money As a Teaching Tool
The most effective ways to teach a young child is to keep lessons as practical as possible, and the most effective way to do this is by providing them with pocket money or allowance, and a piggy bank. This way you can effectively base your lessons on money on how their practical use of the commodity. Remember, life is sometimes the best teacher and your child should be no exception.
If is important to note that, children too are susceptible to similar faults that we make. Just like most of us adults who tire of saving because it takes a lot of time and discipline, children may also feel the same. A good strategy is to have your child set to buy a doll or toy car at the end of the saving term. Ensure that it is not something too pricey that would take ages to attain otherwise it will become too frustrating increasing the likelihood they will give up. Instead, make the goals specific enough, measurable, attainable, realistic and achievable within a reasonable time frame.
Make sure that it isn’t too pricey or it will take long for them to reach their goal, and thus increase their likelihood to give up due to frustration. Instead, make the goals specific enough, measurable, attainable, realistic and achievable within a reasonable time frame.
However, even if they come up with a very expensive goal, don’t discourage them. Instead, help them come up with a reasonable plan to achieve it within a reasonable time frame. Goals will give your child the much-needed patience and motivation to save.
Lesson 4: Teach them about retirement accounts
It is never too early to start thinking about retirement, but it can be too late to think about retirement. You would not like your children to be doing odd jobs during their sunset years because they failed to manage their money more wisely. Learning about retirement planning and pension is good for the society because those who save, spend and invest more wisely are less likely to require a bailout from family and friends. We are the number one influence on our children’s financial behavior and the sooner we start taking advantage of every teachable moment, the better off our children will be.
Lesson 5: Teach them to think like owners instead if shoppers
Owners do not get carried away by the latest shopping craze or trend. While I cannot recommend the appropriate amount you should give to your children as an allowance, it should be used for a legitimate purpose. For instance, you make them responsible for buying whatever they need like the latest gadgets or to replace items they lost. Buyer’s remorse is a tough lesson that can only be learned through experience.
Over time, children will learn to distinguish between wants and need and learn to be responsible shoppers by not getting carried away. Let your child make mistakes, we all spend money on things we wish we could return to the store later. It is through these lessons learned at an early age to your child is able to have an owner’s mentality rather than a one of a shopper.
Lesson 6: Teach them to use credit cards responsibly
Children need to learn that we all have a limited amount of money to buy all the things we need and want. Setting limits and helping your child understand the difference between needs and wants are key lessons to learn at an early age. Credit cards eliminate limits and if not used wisely, children may adopt bad money habits of spending what they do not have. A great way to start is to explain to your child how the family makes buying decisions. When you are shopping with your child, ask aloud so they may hear – “do I need this?, Would it cost less someplace else? Can I borrow it instead? Or perhaps there is a similar item on the shelf that is selling at a discount”. Talk to them about how you decide what to buy and what to pass up. Which is more an important biscuit or fresh fruits?
A great way to start is to explain to your child how the family makes buying decisions. When you are shopping with your child, ask aloud so they may hear – “do I need this?, Would it cost less someplace else? Can I borrow it instead? Or perhaps there is a similar item on the shelf that is selling at a discount”. Talk to them about how you decide what to buy and what to pass up. Which is more an important biscuit or fresh fruits?
Lesson 7: Teach them to go for their dreams
Teach them to pursue their dream relentlessly and to aspire for the universe if possible. The sky has not always been the limit.
Lesson 8: Teach them to share and care for others
Helping others has its own inherent value as it gives the one that is giving happiness. It also connects you to the fate of others. But it is not all about helping the less fortunate. Your child’s school may need volunteers and financial support sometimes. Volunteering teaches our kids the importance of responsibility and teamwork. Therefore, share with your children what you do to help others and why. Ensure that you involve them in those activities, and ask them about the things they would like to do to help others and help them achieve this end.
Lesson 9: Use the Internet to teach your kids about money
Improved financial literacy means improves financial decision making. More informed choices lead to better decision-making and taking responsibility for those choices. There is a lot of information on savings accounts and investment options for the young. However, keep an eye on this as the internet has become quite a dangerous place these days.
A lot of us have learned most these lessons through experience and having some basic common sense. But not all of the lessons sunk in and that means, ensure, you pass on to your children good money habits that will ultimately help them in life.
This article originally appeared on Wealth Architects, a financial advisory that seeks to unlock your financial potential!
