Because very few high schools offer courses in personal finance, the challenge of financial education for your children rests squarely on your shoulders. The earlier you start teaching your kids about money, the easier it will be for them to grasp sound financial habits that can serve them well for the rest of their life.
Children lack two things adults have in abundance: experience and perspective.
Teaching your children about money doesn’t require you to have a perfect track record. Your mistakes can actually serve as an example of why a certain habit or strategy doesn’t work.
Consider these ideas to start educating your children on money matters:
1. What is money? Children quickly learn mom and dad use money to buy stuff, but they usually lack the understanding of where that money comes from.
* It can be helpful to give them an example of bartering. Explain that long ago, a person might have traded a horse for a cow. But having money allows someone to buy a cow, even if that person doesn’t want a horse in exchange.
* Discuss with your children about how people have jobs and work so they can earn money to pay for a house, car, clothing, entertainment, and other expenses.
* Make the point that money is a medium of exchange. You have likely exchanged a certain number of hours of your time to earn $100. You then spend that $100 on goods or services worth $100.
* Show them all the different types of money, including coins, and explain the values.
2. Let them earn money. This is the best way to show them how money works. Let’s dispel the misconception that money magically appears from the ATM. Give your children small jobs to do in exchange for money. Explain to them how your family earns money.
3. Goods and services are exchanged for money. Explain to your child that money is exchanged for value, and that value is either a good or a service.
* Give some examples of goods. Furniture, toys, games, and food are some examples of goods. Ask them to name a few more.
* Also give examples of services. Your state pays teachers for providing a service. Paying someone to paint your house is another type of service. A doctor also provides a service to his patients.
* Explain that money isn’t normally just given to an adult. Money must be earned by providing a service through some type of job.
4. Needs vs. wants. It can be helpful to explain to your child the difference between needs and wants. Give them a list of each. Make a game out of it. See whether they can guess whether an item is a need or a want.
* Some examples of some needs include food, water, clothes, home, and heat.
* Wants would be toys, eating out at a restaurant, magazines, and owning a television. These are items a child can relate to.
* Explain that needs always come first and sometimes there isn’t enough money to buy everything you might want. Sometimes you have to choose.
5. Open a savings account in your child’s name. Most banks have special savings accounts for children with minimal fees or none at all.
* Discuss with your child why people keep their money in banks.
* Explain how interest works. Encourage your child to continue building their savings account so they can earn more interest.
* Go over the monthly statements with your child so they have the opportunity to develop an understanding of the process.
Teaching a young child about money is a great first step to ensuring a life with minimal financial worries in adulthood. Most financial issues can be avoided by having good habits and an appreciation for money. Teaching your child about finances is one of the best things you can do for them.