One of the most important things we do as parents, in addition to teaching our kids right from wrong, is teaching our kids to be financially responsible. Jokes about taking care of us in our old age aside, beginning your child’s financial education as early as possible is one of the best ways to make sure that they will be able to take care of themselves even after we are gone.
Of course, before we can teach our kids about financial responsibility, we have to be able to understand at least the basics of financial responsibility ourselves. Here are some of the basic tenets of being “good with money” and how to apply them in lessons your kids will understand:
Perhaps one of the best rules in life is to save at least 10% of every paycheck. As an adult you can do this automatically through your employer’s direct deposit system. Simply have your employer deposit 10% of your paycheck into a savings account for you so that you don’t have to remember to do it yourself and won’t be tempted to skip it every once in awhile.
For your kids, the easiest way to teach this lesson is to start them out with an allowance and then make them put a small portion of that allowance into a piggy bank that they aren’t allowed to touch. This will get them into the habit of looking at their money as something to be saved instead of something to be spent. You can reinforce this idea–since saving for retirement and emergencies isn’t something that many kids will understand–by having them save up for a large purchase like a bicycle, gaming system, etc.
In addition to saving for the future, investing is also important for your future financial independence. If you are new to investing you can learn about this at the same time as your kids via CDs. CDs are certificates of deposit and are like a high interest savings account that can’t be touched for a predetermined period of time.
This is also a great opportunity to teach your kids about research and making sure that the investments they make are solid. Sit down with your kids and show them how to use independent sites to find the best CD interest rates and how to evaluate terms and conditions to make the best decisions.
Dealing with Debt
As much as we’d like to think otherwise, unless you plan on gifting homes and automobiles to your children, debt is a part of life. It is important that your kids learn how to handle and pay back debts responsibly. To do this, you need to be able to teach them how to evaluate loan terms, calculate interest and how that figures in to the repayment process.
The easiest way to do this is to loan your kids enough money to buy something and then have them pay it back to you, with interest, over time. Conveniently, this is a great way to reinforce the consequences of failing to pay back debts on time–no future loans, taking away the prized item if payments aren’t made, etc.
Of course, to do this, you need to know how interest works and how to apply it to their payments. This is also a lesson that might be best held off on until your kids are old enough to do the math to figure out payments/interest themselves.
Each of these lessons is important, especially in terms of putting money away and managing debts and investments. As one-at-a-time lessons they can be a great way to reinforce responsible spending and saving and are good for teaching kids to plan for their futures and emergencies.
Perhaps the biggest lesson, though, is teaching your kids how to build and stick to a budget. Living within the confines of a budget is the real key to financial responsibility. It’s what keeps people from spending all of their take home pay or spending all of their grocery money on an expensive treat.
Obviously the best way to teach your kids how to create and live within a budget is to lead by example. Have them sit with you as you put together your list of monthly expenses. Take them grocery shopping (and make them leave their games and screens in the car) so they can learn how to evaluate the cost of real items and weigh that cost against an existing budget.
Teaching your kids what life actually costs and how ideas like loans, investing and saving actually work is important. It isn’t enough to simply talk. When it comes to kids, you have to show.