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Teaching kids about money

Just as with anything worth learning, the earlier you start and the more time you dedicate to it, the better off you will be.  So it goes with personal finance.  It is never too late, or too early for that matter, to start forming the habits that can shape your financial future in either a positive or a negative way.  The sooner we learn how to manage our money, the easier it will be in the long run.  If you have children, why not start teaching them now?  This article discusses some steps you can take to prepare your children for life long financial health.

  • Educate yourself…

First and foremost, you have to know something about (if not actually have) healthy financial habits yourself.  It is impossible to impart knowledge that you do not possess.  It would be even better if you could be a good example of the behavior that you hope to observe in your children.  Therefore, it is essential that you do a little research on budgeting, saving, cutting costs, how to avoid debt and   hinvest for building your future nest egg.

  • Go at an appropriate pace…

They’re children.  They are not going to become investment bankers overnight.  It’s important to move at a pace that does not overwhelm them, and that gives them enough time to become skilled at one task before moving onto another.  Which brings us to the next point:

  • It must be hands on…

The best way for anyone to learn anything is by actually doing it.  Let your children learn by actually putting their knowledge into practice.  They will make mistakes.  Adults make financial mistakes every day!  What better way to learn than through trial and error?  If they make a mistake, help them to understand WHY it was a mistake and they’ll be less likely to repeat it in the future.

  • Let them make some financial decisions…

Kids need to learn the value of a dollar.  If they do not have control over some aspect of their spending before they reach adolescence, they will have no concept of how to allot it wisely.  A good way to teach them about smart spending is to give them some money from your budget to manage.  For example, if you currently spend $50 per month on entertainment, let your child take control of that money.  At first, they might make some poor decisions, however it won’t take long for them to realize that they may have to sacrifice one thing for another.  You could do this with their budget for clothing as well.  They might want those new Nikes, but they can’t possibly afford them if they also want those Ralph Lauren jeans!

  •  Help them make goals…

With the amount of advertising out there geared specifically to children, it’s not surprising that kids want almost everything they see.  By allowing children to take spending into their own hands, they will learn to prioritize their wants and their needs.  If they have decided on a big ticket item that they can’t presently afford, you’ve got yourself a teachable moment!  Make a chart to help them visualize their goal.  If your child has chosen an item that costs $200 and they earn $100 per month in allowance, teach them that they will have to save $50 for 4 months, $75 for just under 3 months, or their entire allowance for 2 months to be able to afford it.  Watching their savings grow will be exciting, and they will take such pride in actually reaching their goal!

  • Help them create a budget…

Rather than just letting them watch their pile of cash dwindle without being able to account for where it went, teach them the importance of setting a budget.  At this point in their lives, it does not need to be minutely detailed.  However, even just allocating their money for different purposes can help them keep track of where it is going and make adjustments to their spending.  Going back to that $100 per month, help them budget perhaps $40 for savings, $20 for a movie, $20 for a friend’s birthday present and $20 for pocket money.  Instilling in them the importance of sticking to a budget, and that it is not such a daunting task, is a valuable lesson that they will carry far into the future.

  • Let them pay their own bills…

In this day and age, many teenagers have their own cell phones.  Include in their monthly allowance the amount of their typical cell phone bill and leave it up to them to pay it.  This will help them to learn responsibility.  If they do not pay it in time or at all, their phone will be shut off.  If their bill goes over the usual amount, they will have to come up with the difference on their own.  Remember though, since the bill will likely be in your name, it’s important that you keep track to make sure that they are actually paying it!

  • Teach them about debt…

Often, you will find that your child wants something that they just cannot afford.  Maybe they will come to you to ask for a “loan”.  This is a great opportunity to teach them about debt.  If your child wants to borrow $100, show them that they will have to pay it back monthly, and with interest.  Show them the final amount that they will actually have to pay back on their loan.  And, of course, teach them the consequences of failing to make a payment for whatever reason.
And finally, when they’re ready:

  • Teach them how to invest…

An important lesson for adults and children alike is how to invest wisely.  Teach your children how they can use their money to make money, and how it can help them to reach their goals at a faster rate.  This is a useful lesson for teenagers saving for their first car, long weekend to Disneyland or for a summer trip after graduation.  Talk with them about the different types of investment vehicles available, and how to choose the best one to meet their goals.  They might have to sacrifice now, but hopefully it will pay off in the end.

The value of sound financial health cannot be overstated. Teaching your children from an early age will place them on the road to being money savvy and confident in their spending habits.  

For more information on how to prepare your children and yourself for a successful financial future, contact Select Asset Management today.

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