No one comes into this world with financial literacy skills. They must learn them. Once upon a time ago, kids could learn these crucial skills by taking a class in junior high or high school. However, nowadays, it seems like common sense classes like “money management” just don’t get offered in school like they used to. But kids don’t need to learn personal finance in school: Parents can help their kids gain financial literacy. Here are three keys to keep in mind as you teach your kids financial literacy.
Teach Them to Earn Money
Many sources suggests that parents teach their children about financial literacy by doing activities that simulate situations they’ll face in real life. One simple way to do this is to encourage kids to earn their own money. Just like John Houseman said in the 1986 “Smith Barney’ commercial the “old fashioned way” is the best way to teach your kids about money.
Initially, kids can earn money by doing chores and getting an allowance for those chores. Busy Kids the author of “financial literacy for kids” suggests that parents even give kids a payday – maybe every Friday or even every other Friday. This will also be similar to how life will be once they’re adults earning their own money. They say, “If your kids are old enough to tell you to buy them things at the store, they are old enough to start learning about money.”
As they move into their pre-teen and teen years, especially as they get to be driving age, kids can go out in the world and pick up small jobs. That job at the local fast food place could earn them enough to pay for a used car plus the gas and insurance on it. Or it can be put away for college. Kids should learn that they can have power over their financial lives and learning how to earn money counts as one very real way for them to learn that lesson.
Needs Versus Wants
An Investopedia article points out that knowing the difference between needs and wants can be difficult for kids, especially small ones, to learn. (Many parents feel challenged by this, too, for that matter.)
If you want to teach your kids how to use their money wisely, start with teaching them the difference between these two concepts. Point out that items like food, clothing, or shelter fall into the “needs” area, whereas a night at the movies or a new toy falls into the “wants” category.
That said, some needs can turn into wants. For example, while everyone needs food, it isn’t critical to go out to a restaurant every night to get it. The same can be said for buying designer clothes versus a less expensive brand. Learning the difference between these types of needs means that kids can save more of the money they earn in the long run.
Learning to Budget
When kids learn to budget, they are actually learning the value of their money. It’s one thing for kids to earn money. It’s another thing for them to learn how to use it wisely. They need to learn that money is not infinite. There is a finite supply and so you must choose how you spend it. This is the biggest problem wealthy parents face and why we so often hear about kids of wealthy parents going wild and eventually ending up in some rehab clinic.
Kids need limits and to understand that their choices have consequences. If they choose to spend their money on candy they won’t have it for a larger purchase like a video game.
This is the reality of budgeting. As adults, they’ll be constantly asked to make decisions about where their money goes. If they don’t learn how to make these decisions, early on in life when the consequences are small they’ll probably make unwise financial decisions as adults when the consequences are much larger.
Final Thoughts on Teaching Kids Financial Literacy
Teaching kids how to take care of their money while they are still kids can help them become financially healthy adults. They must learn how to take care of their money, even if their school doesn’t offer classes in money management. You, as their parent, should teach them about the concepts of budgeting, saving, and spending. If you do, they stand a better chance of developing excellent and healthy financial habits that will benefit them well into adulthood.
