Getting started teaching your child about money
You expect your child to learn about math, reading and science at school, but what about personal finance? Dealing with money is an important part of their everyday lives. It will affect the choices they have and the decisions they make. Most of us had to learn lessons about money the hard way but it doesn't have to be that way for your child.
Here are five ways you can start teaching your child how to be confident with money today.
- Pay them an allowance
A good way to start teaching your child about money is with a weekly allowance. Letting your child learn how money works for themselves is a powerful tool to practice money management. An allowance lets them test the principles of budgeting, saving, impulse control and delayed gratification before they go out in the real world.
How much allowance you pay them depends on your financial means and what you expect them to be financially responsible for. An allowance should be treated like a pay cheque rather than a gift – something that is earned. Agree what chores they are responsible for then if they don’t do the chore, they don’t get paid. Cause and effect. It should also be clear to your child what they’re expected to buy with their allowance and what you will still pay for.
Pay it in cash
It’s a good idea to pay the allowance in cash. That way it’s real - they see it growing and diminishing. Get them to allocate it between three containers labeled “Spend”, “Save” and “Give”. It’s up to them which containers they split it between because they earned it, it’s their money. They then get to experience the consequences of their decisions.
Don’t come to their rescue
Once they’ve used up their allowance it’s important to not give your child unlimited funds for discretionary spending. If you do this, they may develop a habit of relying on additional funding sources when they want something they cannot afford. This can lead them into personal debt and high-interest credit cards as adults.
The idea here is to allow them to experiment with money of their own by allowing them to make their own financial decisions and to see the consequences of those decisions.
- Teach them about Saving and Interest
At three monthly intervals, get your child to put the money from their savings container into a youth Savings Account so they learn the basics of banking and earning interest.
Explain the difference between Checking accounts and Savings accounts and what interest is.
Establish a savings goal
It can be as simple as identifying something they’d like to save up for and then working out how much of their allowance each week they want to put in their savings container for it. Once they’ve saved enough money to meet their goal, check whether they’d like to use it or keep saving for something more meaningful or valuable.
For children 10 years or older you can introduce simple and compound interest and explain the benefit of starting to save early.Get them to search banks online to discover what interest they are paying on Checking and Savings accounts.
Use online calculators
These are easy to find online and easy to use. See if your child can find a savings calculator online that tells them how much they can achieve by saving and how quickly they can reach their goals.
A good learning activity is to get your child to pretend they have just been given $1,000 by their grandmother on the condition they bank it for one year. Get them to research which bank will give them the most money by the end of the year in a Savings account.
For older teens, you can use the same exercises to get them explore the cost of buying a house. Get them to search on a real estate website and select a house. Ask them to calculate how much is required for a 20% deposit and work out how long it will take them to save this amount using an online savings calculator. Then use an online mortgage calculator to help them work out the repayments required for the balance (80% of the purchase price). Get them to explore how changing the loan amount, interest rate and term can affect the repayments required.
- Show them how to spend wisely
When your child has their own hard-earned money to spend, you’ll want to teach them ways they can get the best value. Here are some activities to get them thinking.
Pick a product and ask your child which stores they would go to to compare prices. Can they find similar products at a cheaper price? Cheaper is not always better; ask them what “The bitterness of poor quality remains long after the sweetness of low cost” means.
Buying during sales
Get them to search online or in the newspaper for stores having sales. How much money in dollars can they save if they buy something on sale?
Find something to buy online and go through the process with them. Explain how to check that the site is a legitimate business. You might be prepared to share with them a bad experience you’ve had shopping online and discuss how you could have ensured a better outcome.
Buying second hand
Get them to buy and sell something second hand. Did the thing(s) they purchased second hand work like they should? Did they last?
Discuss peer pressure
Ask your child if they’ve ever felt pressured to do something or own something to fit in? Comfort them with the understanding that everyone feels peer pressure, it’s not just them. Tell them if it makes them feel uncomfortable it’s fine for them to say “no”. If they focus on their strengths and things they like, they will attract people who value the same things and enjoy healthier relationships.
Ask your child if they’ve seen an advertisement and thought to themselves “I’ve just got to have that!”. Identify some strategies they can put in place to resist acting on that thought.
- Teach them to budget
Budgets are one of the most powerful tools you can give your child to learn how to control their spending. Start by explaining what expenses and income are. Then discuss the difference between needs (e.g electricity, rates, insurance) and wants (e.g chuck steak vs fillet steak, holidaying in a camping ground vs staying in a motel).
Prepare a budget
Depending on their age you can get them to create a budget for a party or a family holiday. If your child is older, get them to create a monthly budget for the family using an online budgeting tool so that they get an understanding of living expenses, disposable income and the difference between a deficit and a surplus.
For younger children you can simplify the exercise to creating a budget for a family holiday or if they’re going to a birthday party, give them a budget they need to stay within to shop for a gift. This will teach them about comparison shopping.
- Talk about money every day
Talking about finances is an important part of helping your child develop a healthy relationship with money. Instead of approaching money conversations as serious dialogues, make it a regular part of your day-to-day interactions. You can even turn lessons into games. Here are some ways to start bringing money into your regular conversations:
- If you’re talking about a profession, see who can guess closest to the median salary.
- If you’re at a restaurant, let your child guess how much each dish costs. Compare that amount against what they have in their bank accounts to give them some perspective.
- When you are grocery shopping, ask them why some things cost more money than others. Is it the same product with different branding? Or does it have more features or is it of higher quality to justify the higher price?
- When you're paying bills, take the opportunity to explain fixed household expenses versus discretionary ones.
- Include your children in financial decisions. For example, at the supermarket you can look at the circular together to see what’s on special before deciding what to make for dinner. Or you can ask them to make budget-based decisions, like they have $20 to spend on dinner each night.
These activities will get your child to start thinking about the role of money in everyday life.
Making it happen
Good money management won't be hard for your child if they learn the basics and have experience managing small amounts of their own. To implement the ideas above, why not pick one activity a fortnight and explore it with them. Within 6 months they will be little cash generals and ready to learn what they can do to grow their money in order to reach bigger financial goals.