Friday, October 5, 2007

Teaching Our Kids About Money

Zenhabits recently did a good post on teaching your kids about money that got me thinking. As a parent of two young kids and many other parents this topic has crossed my mind before. Even for those without kids there are some points to consider here. When you look at the amount of personal bankruptcies, credit card debt, and spending and saving habits of many people today you can see that many of us have a lot to learn in the area of our personal finance!

There are four basic guiding principles to teaching our kids about money according to the post:

  • Educate yourself. This principle applies to everyone, parent and non-parent alike. It is hard to teach what you don't know. Education is often the first of many steps in many things in life. While you might not be able to become an expert, you'll want to learn as much as you think that you need to know about budgeting, saving, investing, reducing your debt, and cutting your costs. When you understand these things better, it will help you to be more prepared about your own personal finances and teaching your kids.

  • Be a good example yourself. Most of us have heard the expression that actions speak louder than words. If what you tell your kids is the complete opposite of what you actually do, then they will tend to learn from what you do and not what you say. You may even sabotage your credibility with your kids by doing this.

  • Teach them one habit at a time. Have patience in teaching your kids about money, they won't learn everything overnight but over the course of their childhood and even their lifetime. Don't be in a rush to teach it all at once, but so that they learn it. This can mean working on one lesson at a time, because if you try to do it all at once, the lessons are less is likely to stick. Developing knowledge and good habits related to your children's personal finance (as with other areas of life as well) will take you a while, so remember that you're in it for the long haul.

  • Let them learn by doing. While you can tell your kids a lot, they'll learn a lot more from doing it themselves. This is learning by experience or doing. Sure your kids will make mistakes but you can discuss the mistakes that they have made and they can learn from these, adjust, and (if things work out) they'll learn better habits by doing.

The post goes on with ten valuable lessons you can teach your kids about money:

  • Give them control of money. Your children need to be in control of some amount of money as kids, so that they will be able to control their money later on. They need to learn that there is not an endless supply of money to be provided at will by mom and dad, grandparents, the government, or society. If they don't learn this as children it will be a lot harder to learn later on. You can give them an allowance weekly, monthly, or some other combination. You could also give them a certain amount of money that you planned on spending on their clothes, school supplies, and so on, that you planned on spending on this items and make them responsible for this part of it. The point is that they realize that they will have so and so much money to spend and that they can plan based on this. They will most likely spend some of it foolishly but through trail and error they should realize that they will want to better plan and choose what they spend their money on more wisely and that some of the things they want, they will need to save for.

  • Teach them to save for monetary goals. After they have a chance to realize that there is more to money then just impluse shopping, they'll want to purchase more expensive things, things that cost more than they would be able to buy with their allowance. If they want to buy a new bike or a video game system (as the parent you don't have to automatically allow them what they want, if it goes against your beliefs and the way that you're raising your kids). Now you can explain how they can save their money to reach their goals. You can show them how if they don't spend all of their allowance on small toys, candy, or other things that are immediately gone after purchase, that they can save up for their bigger goal. Now is your chance to be creative in keeping them motivated to save for their goal. You might do somethings on your computer to track their progress. You could cut out a picture of what they want to get and put it in a place that they will see often. This will help to build excitement along the way and they will be so excited when then reach their goal, knowing that they saved so and so long for it.

  • Teach them that reducing expenses makes goals come faster. This lesson goes with the one above it. Kids will learn that the if you want buy something faster, then they'll need to save more, which means spending less on other things. It is worthwhile to have a discussion about spending and saving and so that they realize they should consciouly think about what they're buying (or not buying) whenever they think about making purchases. You want to get the point across that that they have choices in what they buy or don't buy and using these choices can bring them to their goals quicker or take them longer (or not at all) if they don't reduce their expenses.

  • Teach them about how your money can make money. This is a lesson on investing that many of us should learn and use. To do this a larger financial goal is needed, perhaps a downpayment for a car or a trip, something with a longer time horizon. You can talk about savings accounts and other tools. It can be very motivating to see that you earned this much interest, just by not spending your money on something else.

  • Teach team about creating a budget. This doesn't need to be complicated but needs to show them that their pile of money gets smaller and smaller with every impulse purchase. If kept simple, they can develope the habit of keeping a budget and they might not develop the fear of creating and keeping budget that plagues many adults.

  • Teach them to pay bills. If your kids have their own cell phone, you could make sure that they're responsible for paying the bill (you might want to include the amount of the bill in their allowance as part of their budget). If they're late, there will be penalties, late charges, or maybe even their service could be cut off. You could have them pay other bills and involve them in paying the bills. If you do have them pay any bills themselves, you'll want to monitor that they're actually paying the bills and not doing something else with the money.

  • Teach them about the dangers of debt. While discussion on this topic might not be easily understood by younger children, as your kids get older you'll need to explain loans, the use of credit cards, and other debts. You can arrange to get them a credit card, that they'll have to pay for! If they now add the credit card payments to their budgets then they should learn about how interest payments take away money that could be spent or saved for other things.

  • Teach them that earning more money gets them closer to their goals. If your kids have some larger savings goal, they'll learn that by cutting their expenses that they can reach their goal sooner, but they can also learn that by earning more money, they can reach their goal faster. They can do things like babysitting and yard work for neighbors, washing people's cars, and etc. As they get older they get a part-time job. You might even allow them to do some extra projects around the house but this should be in additon to their chores or the things that they need to do around your house as a member of your family. A lot of people seem to think that allowance shouldn't be tied to chores at all.

  • Teach them about advertising and consumerism. Advertising might seem clear at first glance, but what is consumerism you ask? My understanding of what is meant by this, is the focus that is spent on all of us consuming products and services (especially new ones). Advertising and marketing are designed to entice you to buy something (product, service, idea, etc) that you might not necessarily really need or want. With advertising and marketing there is often a keeping up with the Joneses and an unhealthy competition is encourgaged or your emotions are played so that you desire this or that. This has lead to a lot of unthought out purchases and items laying around that are not being used, not to mention our land fills overflowing, and the damaging effects on the environment.

  • Teach them about impulse buying. This is closely related to item nine. We need to teach our children to think more about their purchases before buying. They need to be able to recognize the signs of impulse buying (increased heart rate, faster and heavier breathing, or other signs of excitement). They need to stay away from places and things that might encourage uncontolled spending. They also should not buy things just to impress others (cars, clothes, gadgets, and etc.) .

You should also check out these articles mentioned in the post, as there is a lot of good information provided in them:

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