Teaching Kids About Money: 5 Things They Need To Know
Make “money essentials” part of your child’s early training. Good habits are hard to break. These will pay dividends their entire life!
Money. When you have it, it doesn't matter. When you don't, it is the only thing that matters. Teaching your children about money is all about skirting the fine line between feast and famine. They need to understand that money is important as a mechanism for having other things, but that it has no intrinsic value of its own. Children can learn a lot of this via osmosis - as your kids see you treat money as a means to an end instead of as the end itself, they will naturally come to understand the role that it plays in our lives and society. There are, however, some specific lessons that can help young people understand how money works in practice and avoid some common pitfalls in earning, spending, and saving.
Money Doesn't Grow on Trees
Teaching your children that money is abundant and always available can be just as harmful as teaching them that it is scarce. On the one hand, a child will not appreciate the work that goes into earning a decent living. On the other hand, they may prioritize money above all else, being all too aware of how little is possible when people truly have nothing to spare. Like so much in life, it is all about finding a happy medium.
No one creates false poverty. Parents of children that grow up poor usually have little choice in the matter, or at least cannot find a way out of the situation. However, many parents make the mistake of giving their children too much, too easily. Instead, find ways to teach your kids about the hard work that goes into making money. Give them an allowance for chores completed and insist that they buy luxury items from their funds. Encourage them to start a small business, even if you are their only client.
Money is a Measure of Value
Teach your kids that money is a measure of value, and make sure they understand that people earn by creating value for other people. There is a wonderful story in Thoreau's Walden where a man makes baskets and is then offended that no one wants to buy them. "Do you mean to starve us?" he asks. Thoreau goes on to explain that no one can be expected to buy a basket just because someone has woven one. We are all free to weave them all the same, but if we expect to make anything from our endeavors, then our products need to be valuable to potential buyers.
The takeaway message here is that money is not a human right. No one owes another person a job or income. Instead, it is each person's responsibility to find a way to create value in this world. The value created can easily be sold.
Budgeting is Your Friend
To be fair, children don't need budgets. Budgets only become important when you can't afford all the things you want and pay for all the things you need. Kids avoid this whole problem just by being kids. We make sure they get what they need, and we should. We should also prepare them for the day when they will need to finance their wants on top of their needs. Luckily, a budget is a budget, and kids that budget their wants will eventually transform into very capable budgeters of needs as well. Teaching this lesson requires two basic things: access to money that is their own, and the need to have unmet desires. These two prerequisites coupled with subtle, or not-so-subtle, suggestions should lead towards the idea of savings, which will, in turn, introduce them to the fundamentals of budgeting.
You can also get your kids involved in family saving and budgeting schemes. A jar of spare change that will be spent on something fun once it's full or a shared ledger of your savings for a big family trip will get children used to the idea of a budget.
The Wow-Factor of Compound Interest
Most parents save this one for their teenagers, but you can introduce it much earlier. Compound interest is magic. Instead of looking only at the interest accrued on your original, principal value, take into account the interest that will accrue on your interest over time. Interest is especially relevant to retirement savings, but the message can be brought home with a college savings account or any other small savings account your kids can access. As the interest grows, they will understand more about why and how this happens.
Though you probably don't want to scare your children with the boogeyman of debt too early, an understanding of interest as it relates to savings is a good way to introduce the dangers of debt. The magic of compound interest works both ways: when you're the lender, it works for you, and when you're the borrower, it can work against you. Kids that get excited about watching their interest grow will hopefully have the opposite reaction when they realize that debt requires them to pay that interest out.
The Best Things in Life Are Free
The things that make our lives whole don't cost a dime. It may be a cliché, but it is also true and very powerful. For most of us, our favorite memories with family aren't of Disneyland, amusements parks or fancy resorts. They are of family dinners and the time-consuming family meetings, of board game nights and silly jokes. They didn't cost anything. Of course, to enjoy these things people need a standard of living that includes safe housing, nutritious food, access to medical care and a budget that covers the basics without too much worry. Beyond the minimum income that covers that standard, however, time is often a more important commodity than money.
The best way to instill this knowledge in your kids is just to make sure you have family time with the television turned off, away from expensive sources of entertainment. At the end of the day, the people you love are the best source of entertainment, so enjoy them while you can. Your kids will thank you for it.