How to Teach your Children about Personal Finance

If you’re like most adults, you probably want your children, or any youngsters around you, to develop good financial habits. Northwestern Mutual delved into the subject of children’s financial literacy in a recent survey of parents. The study revealed that 71% of parents feel that children should begin learning about money no later than the 1st grade. Since children often copy what their parents do, it is important for parents to practice, as well as preach, good financial habits. Children learn by your example; they copy what they see. Therefore, the best way to teach your children about personal finances is to set a good example in this area and to start early. Children learn the value of money, or lack of it, from an early age and what they learn is how their parents value money.

When do you start teaching children about personal finance?

The first opportunity will come when your child asks for the latest toy they see on TV or in the store. Supermarket shopping with kids gives regular opportunities, as they are tempted by the vast array of colorful packaging. While it may be difficult, this is the time to start teaching your child they can’t have everything they see and want.

Trying to explain the finer points of finance to a screaming toddler in a long check-out line is never going to be effective [Editors Note: It would make for a great YouTube Video]. Make a deal before you shop; maybe a small reward for good behavior and no demands in the shop. This is the first lesson in waiting for what you want instead of indulging in the modern trend of instant gratification.

Research done by the BC Council for Families suggests that a child of three has a basic understanding of money and its purpose. By the age of twelve, the child has already formed the money habits and beliefs they will have in adult life. Because young children learn through play, games that involve recognizing and counting coins are a great learning tool. In stores, show young children price tags to help them understand how much things cost.

School age children can benefit from having a small allowance to help them understand money, saving and spending. Encourage or insist that your child saves a set percentage of their allowance and allow them to spend the rest, if they choose. Saving can be in a piggy bank or in a bank account. Encourage them to set a spending goal; to save up for a special toy they really want. Setting a goal is a great teaching tool that encourages self-control, saving habits and the joy of delayed gratification.

Older children benefit from understanding and practical application of the concept of needs and wants. Many parents fund the needs of the child’s life while they must save or work for the things they want. In this way, the necessities of school, food, housing and clothes are provided with the child being responsible for special things they want. Pay their allowance or pocket money less frequently; then teach your child how to budget and track their spending to make sure their money lasts until the next pay day.

What do children need to know about personal finances?

• The difference between wants and needs. Needs take precedence over wants and wants will often have to wait. Needs tend to remain fairly constant while wants change with time, especially with children.
• The value of money; that it is a finite amount and can only be spent once, but we have choices as to how we spend what we have.
• The importance of saving and living within your means.
• An understanding of spending, credit cards, creating wealth and investing.
• How to set financial goals and the steps to take to achieve them.
• How to make a budget and live within it.
• That money is simply a means to an end and it is not the end in itself. They need to learn how to prioritize and decide where to spend their money.
• That there is no such thing as ‘easy money’, that it has to be earned and that using credit costs extra.

Involve your children in discussions about the family’s finances to help them understand the bigger picture. Let them see you paying bills, balancing your check book and reconciling your bank statements. From an appropriate age, let them have some input about how family money is spent. By using these ideas about how to teach your children about personal finance, you will be helping them become financially-responsible adults.

So if you have kids, what methods have you used to teach them about finances? If you don’t have kids, what methods did your parents use to teach you?