Smart money, smart kids… Making children more financially savvy is a vital role for parents. For many, they were not taught these skills as youngsters, making it more challenging to guide their children on money-saving tips. What’s more, being smart about finances has changed exponentially with today’s online world, and parents often feel inadequate.
The responsibility of financial awareness and good judgment should not fall to the schools entirely. It is a community effort led first by parents and buffeted by other influential adults, including teachers, counselors, and community leaders. Though, parents are in the most visible and prominent position in which leading by example can have a more profound impact.
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Children brought up in homes with heavy financial burdens or living pay to pay may feel they have insufficient skills to act as role models for teaching their children how to handle money responsibly. Still, it’s not a question of how much money the family has; it’s a question of how one manages the money there is.
Holding regular positive discussions with children about money is the first step—even if the talks are often about how tight the family’s budget is and how to choose what to spend. These family discussions should also include grandparents and can go far in teaching essential money management and empowering children to feel as though their thoughts on family spending are imperative.
As children reach their teen years and are given an allowance or are working and earning money to spend, these conversations take on heightened importance. The more aware they become, the more insight they will have for school classes that include financial topics.
Start savings discussion when children are young
Time is on the side of young children. Starting a savings account at an early age is a great way to introduce children to the benefits of saving and planning for expenses. Encouraging children to put gift money and chore money into a savings account – and, when able, partially matching their contributions – gets kids excited about the possibilities of what they can purchase in the future.
Make saving money a positive experience. Rather than buy a child the latest must-have gadget, start a savings account and help the child see how the money grows. Spend time at least quarterly to look over the account statement with the child and point out the interest they are earning, show how their deposits are growing, and highlight contributions made on their behalf-such as rewards for doing well in school.
Encourage the child only to spend small amounts on special items rather than withdraw the full balance. The growing principle will take on a snowball effect, and as it grows, the child’s excitement in the process will grow as well. Balances grow the longer the money is in the bank, and with it, the child’s pride in their accomplishment.
For added drama, use an online compound interest calculator to show the child the fantastic possibilities that await if they continue to add to the balance and accumulate interest. If the balance becomes large enough, set a meeting with a financial advisor to help the child explore investments.
Spend a little, save a lot
Children, teens, and young adults should be permitted to spend a little on things that matter most to them. Being able to buy something they want is part of the excitement of saving—being rewarded for saving wisely and managing well. Resist the urge to point out the pitfalls of spending and use infrequent requests as a way of furthering the thrill.
Focus on planning for an expense by teaching children about budgets. When they first experience the excellent feeling of being able to afford something they have desired, they won’t have to be convinced to repeat the process.
Help younger children create a budget of three parts. Focus first on saving, then spending, and lastly, include charitable giving. As children get older, add other appropriate items to the budget-children of the college-age need to account for expenses such as textbooks and food.
Not all debt is bad debt
Most teenagers have a basic understanding of debt. They may have heard about burdensome college tuition debt or want to buy a car. For the most part, steer children away from taking on debt but be clear not all liability is bad debt.
Student loans are one form of good debt. Gaining a college education is an investment in the child’s future and usually leads to higher-paying jobs. It is one of the best investments a child can make. Paying it back over time will put pressure on their budget, but statistically, the benefits of payoff are far more beneficial than the student loan cost.
As children become adults, many begin to think of buying a home. However, taking on a mortgage is good debt and usually necessary because no matter how well a child succeeds at saving while young, it is rare that one would accumulate enough to pay cash for a home. Additionally, a home is considered an asset, and making payments on time boosts credit scores.
Conversely, credit card debt is a costly type of debt, so teaching your child about compounded interest rates is essential. They thought a smart purchase becomes expensive when paid over months or years at a high-interest rate. By saving for the purchase, three things happen: first, the child will know they: can afford the purchase, will not add to their debt, pay less for the item, and earn interest instead of paying interest.
Encourage financial responsibility
To encourage financial responsibility, hold regular discussions about money in the family environment. Depending upon their ages, involving children in pecuniary decisions or explaining financial choices empowers them and puts them on the path to money awareness.
No matter their age, children and parents benefit from the process of creating savings accounts and spending time discussing how to make the balance grow, how to calculate interest, and how to reward oneself with a smartly planned purchase.
Parents do not need perfect credit scores and absolute financial security to instill good spending and saving habits in their children – it’s a learning process from which the entire family can benefit.
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