Most people would agree that there is a gross lack of financial education in many school systems. Many of us realize this upon finishing college or high school when we need to start making financial decisions for ourselves, and we realize we have no knowledge of how to make them. At that particular point, people typically start researching on the internet, talking to parents and close friends, and trying to find the needed knowledge to manage their finances well.
Unfortunately, this approach is often one of trial and error. The lack of financial knowledge in your early 20s can end up costing you a lot of money down the line. When people start earning money and have no idea how to manage it, they may buy a bunch of “stuff” they don’t need, overlook insurance and investments, and neglect to create a budget.
At some point, we become adults that are more financially competent — the people who presumably know what to do with money and how to manage finances. If you’re a parent, it then becomes your responsibility to ensure that your children don’t go into the world without the financial knowledge that you wish you had. This article will talk about how you can raise children that are financially responsible and understand how to manage their money.
Why Raising Financially Literate Kids Is Important
Many parents underestimate the importance of raising financially literate children. However, if you don’t want to see your children grow up to struggle financially, you must invest in that education early on. Kids who understand the value of money and how to manage assets and bills are much more likely to grow up being financially responsible adults who know how to create a budget and stick to it.
It’s important to remember that what kids learn about finances in school is almost never enough. Most teenagers have only the most basic understanding of things like mortgages, insurance, taxes, etc. If you want to ensure that your child doesn’t fall into that category, you often have to take matters into your own hands and start teaching your child about finances from an early age. Sticking with financial literacy education throughout childhood helps the lessons stick and allows children to proactively apply what they learn in real life.
Start Financial Education Early
People tend to believe that we shouldn’t let children handle money; however, this leads to young adults that don’t know how to handle money. Children have to start understanding money and its value from a very early age. In fact, they will likely start establishing their first financial habits as early as the start of elementary school.
Of course, at that age, it’s not necessarily a good idea to talk about the stock market with your child, but it’s a good time to begin showing the value of money and creating saving habits. For example, let’s say your kid says they want a new toy or a new pair of shoes. If you’re already giving them an allowance, you can set a challenge for them — if they manage to save half or ⅓ of the money for whatever new thing they want, you will add the rest and buy it for them.
This is a valuable lesson about the importance of patience and savings, and it’s one that an eight-year-old can easily understand.
As parents, you have to remember that teaching your kids about finances isn’t a sprint but a marathon. There are dozens of small lessons and habits they must learn, some of which can be taught from a very young age.
Include Them In Big Purchases and Financial Decisions
Now, this may sound like a “no-no” for most of you, but hear us out. Children need to understand the value of money, meaning what it takes for you to get it and why it’s important not to spend it on every single item you want.
One way to ensure they appreciate money is by including them in your own decision-making process, especially when it comes to big purchases like a home, a car, etc. Of course, this is a good idea for when your child is a bit older and able to follow your thought process and ask questions when something isn’t clear.
Along with that, including them in this process doesn’t mean you have to disclose all the information or all the little arguments you’re having. It’s more about letting them see how long such a decision takes and what factors you take into account when making it.
This is also a good time to teach them about the “right time” to make certain purchases. For example, if they wanted a phone in August, you could make them wait until November so that you can get it at a discounted price. By showing them — in real life, with a personal example — how much money can be saved simply by having patience, they will likely adopt that pattern of behavior later on in their lives.
Teach Them That Money Is Earned
Of course, it’s inevitable that you will have to give money to your children. However, it’s vital that money is usually earned instead of always given freely. To do that, you can provide them with an allowance after they complete particular tasks like cleaning their room, washing the dishes after dinner, or finishing their homework on time.
This will help them learn the simple relationship “work=money,” and they will know how much effort (not money) a particular product is worth. Just consider this: if your child wants a pair of Nikes and you give them a $20 allowance for the week if they complete their chores. Then they will know that one pair of Nikes is worth 4 or 5 weeks of their effort. An important lesson that, unfortunately, many people learn when they’re no longer children.
Let Children Manage Their Own Money
Let’s say you give your children $25 every week as an allowance. If you give them $5 for each school day of the week, you’re virtually teaching them nothing about spending habits, as they know that even if they spend every last penny they have, tomorrow they will get another $5 to spend.
That’s why it’s a good idea to just give them $25 for the entire week and let them decide how to use the money. That way, if they run out of money by day three and have to reap the consequences for two days, they will learn the hard lesson about the necessity of saving.
Essentially, by letting them have their own “budget,” you’re giving them their first taste of financial management. They have those $25; now it’s time for them to decide how and when to spend it. If they begin to struggle and are constantly out of money by Wednesday, then you will know it’s time you talk to them and show them how to budget and save properly.
This is a practical lesson, and it’s one that most children remember well because humans tend to learn best with hands-on experience. So, don’t worry about your kid being without some pocket change at school for a day or two — that will only make the lesson stick!
In Conclusion
There’s a lot you can teach your children about money from your own personal experience and based on all the things you wish you knew when you were younger. However, as they grow older, they will likely start to ask more complex questions.
At that point, you may want to let your children participate in the meetings you have with your financial advisor and let them ask questions. In fact, just showing your children how you lead a discussion with your advisor, what topics you discuss, and how you collaborate on money matters is a massive lesson for the future, as it will serve as an example for your kids.
In the end, we advise you to pay attention to your children’s financial education. Leaving it all up to what they learn in school won’t be enough, and if you make an effort, they will surely appreciate the results once they become adults.
Please feel free to reach out to me on this or any of your investment needs or questions. I may not always have the answers at my fingertips, but I promise I will get them for you. Michael Torrence
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Michael Torrence – Investment Advisor Representative: Michael was born and raised in Ohio and attended The Ohio State University. After College, he was commissioned as a 2ndLt in the United States Marine Corps. He attended his initial training in Quantico, Virginia, then graduated at the top of his Primary Aviator Class and was selected for the Strike (Jet) Platform.
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