"How do I teach my kids about money?"
I hear this question often, and if you're a parent, you've probably Googled it several times yourself.
In my 30 years of professional experience, I've worked as an auditor, investor, tax preparer and financial consultant — and I've witnessed the impact of financial literacy (or lack thereof) on countless adults of all ages.
Teaching your children about money doesn't have to be complicated. You either put in the effort and time, or you don't. And if you do, it's best to start sooner rather than later. (According to a 2013 Cambridge University study, children are already able to grasp basic money concepts at age three, and by age seven, their money habits are already set.)
My wife and I have two kids, both under 14. Like most parents, we don't want them to suffer from financial anxiety when they're older. Nor do we want them to be in debt and have to eat into our retirement savings.
The same way we want them to understand the importance of telling the truth or saying "please" and "thank you," we also want them to understand the importance of money: What it's worth, why it's important and how to practice smart habits that lead to success.
In order to do that, we keep things fun and simple:
1. We play "Let's Go Shopping"
I've found that my kids are more engaged in the learning process when it's experimental or gamified. "Let's Go Shopping" was a game we played when they were in preschool.
To start, we created a miniature supermarket in our living room — complete with a toy cash register and a farmer's market fruits and vegetables play set. The register featured a numerical keypad, cash drawer and pretend money.
After my wife and I priced the items, we had one child do the shopping while the other handled checkout. We stood by to facilitate and answer questions. But eventually, they became skilled enough to play on their own.
Stimulating the shopping experience sharpened their math and budgeting skills. It also helped them feel more comfortable talking to one another about money.
2. We play "How Much Does It Cost?"
A game that we continue to play is "How Much Does It Cost?" (It's basically our family's version of "The Price Is Right.")
At the dinner table, we all take turns presenting arbitrarily selected items for sale, along with multiple choice answers for their approximate prices.
A few examples:
Games like this help them understand the relative values of various products and services.
3. We don't freely give them money
One of the biggest mistakes I see parents making is offering unlimited funds to their children for non-essentials.
Our kids started getting a weekly allowance when they turned six. We'd give them $6 per week and increased the amount by $1 each year they got older. They could earn more if they did something good that week, like offer to help someone or ace a math test.
Of course, there are no set rules as to how much you should give your children; it mostly depends on your financial means and what you expect them to be financially responsible for.
The consequences of giving your children unlimited funds for discretionary spending (especially after they've used up their entire allowance) aren't realized by most parents until much later.
Children of parents who do this may develop the habit of relying on additional funding sources that can be quite costly, such as debt in the form of high-interest credit cards.
4. We guide them through the budgeting process
The easiest way to teach your kids about budgeting is to budget together.
When my kids get invited to a birthday party, for example, I give them a reasonable budget and help them shop for a gift that stays within their price lane. (My wife and I prefer to do this on Amazon because it's an easy way to teach them how to comparison shop.)
5. We show them how to put their money to work
When my oldest daughter saved up enough money, we relocated her cash from a piggy bank to a local bank.
"Congratulations! You're putting your money to work," I said.
Even though the process makes complete sense to you, it might be too abstract for some children. That's why it's important to explain — in layman's terms — how their money is earning more money (passive income) and how that additional money will continue to generate even more money (compounding).
These are concepts and skills that will serve them for life.
6. We encourage them to do good with their money
My wife and I make it a point to donate to charity or a nonprofit organization every once in a while. It sets a good example for our kids and discourages behaviors of selfishness and greed.
When our kids have saved up enough money, we review a list of charitable organizations together (Charity Watch is a good place to start) and have them pick one that supports a mission they value.
This is a great way to teach them about sharing, kindness and how money — whether it's $1 or $10 — can be used to help others.
Jim Brown is a financial consultant and the founder of Jim Brown Investing. With more than 30 years of expertise in the financial industry, Jim has been interviewed on Yahoo! Finance TV, the So Money Podcast with Farnoosh Torabi, KFNN Money Radio and U.S. News & World Report. He is also the co-author of "Financial Statement Fraud Casebook: Baking the Ledgers and Cooking the Books."
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