Teaching your children healthy financial habits at a young age is an excellent approach to protect them from potential mistakes and provide them with the tools they need to build a solid foundation upon which to build a happy and fulfilling life for themselves. Studies have shown that money habits in children are formed by the time they are seven. It's important to remember that teaching your kids about money management is a process that might take some time. However, if you put in the effort and consistently express a clear message about money to your children, you will be able to develop healthy habits that will benefit them in the future. As they gradually become familiar with basic financial topics, children can take the lessons well into their adult life and feel more comfortable accessing financial services.
As a parent, you want your children to have safety and security, health-wise and wealth-wise, and you want to create a foundation for them to lean on in times of emergency. However, it is quite difficult to succeed in life without good money habits.
Many parents fail to provide their children with financial education due to a lack of time and some are simply uncomfortable discussing money with their kids. Children, on the other hand, actually want to learn about money from their parents. In fact, many of them indicated they wished their parents had educated them more about money, according to a survey.
In order to influence your children's attitudes toward money, you must instil in them a strong sense of financial literacy from an early age.
How to teach your children good money habits
Start their financial education early
Now is the ideal time to begin educating them about personal finance. Basic money concepts can be grasped by children as young as three years old. Most children's money habits are well established by the time they turn 7. That doesn't mean that you stop teaching after the first year of school. Begin implementing money lessons in their daily routine by taking them to the bank when you are opening an account or showing their receipts after you buy something; involving them when you are calculating expenses; even asking for their opinion. You can also advocate for schools to include financial literacy in their curriculum. Financial literacy is a long-term endeavour that requires consistent effort. Including financial education in school curricula from an early age will not only help students develop the information and skills needed to be financially responsible throughout their lives but also their parents, as many parents lack the ability to teach their children about money.
Teach them good financial habits
Good financial habits are not limited to financial concepts, such as emergency funds, debts, investing, etc. Financial habits can also be instilled through awareness, patience and ethical spending. You can inspire awareness by showing the difference between financial needs and wants. If your child wants to buy a game but needs a pair of shoes, you can remind them that they cannot buy the shoes they need if they buy the game. If your child really wants to indulge in impulse buying, as many children do, instead of refusing them, ask them to wait for a day to rethink their decision. This will help your child to weigh their decision and understand possible outcomes. Once children have become more independent and responsible with their own money, it is time to teach ethical spending. Ethical spending could be donating to charities or buying from sustainable businesses, which positively contributes to the market.
Show them how to budget
Budgeting is critical, and children should be included in the process. Children should know how much money their families have and how it's spent. Many parents sit down with their children every month to go through their finances. You will be able to address difficult issues, such as cutting some costs for more important things (cancelling vacations, for example). In the future, children will be more accepting of delaying instant gratification in favour of long-term investments. Children who are taught good money management habits by their parents have better relationships with their partners as adults, according to a study.
Let children earn their own money
Close to 60% of parents pay their children an allowance either in exchange for doing chores around the house or without. The main motivation for doing so is to teach them money management skills.
But there are other ways to help them earn money if they want to do so independently. Most allow their children to earn money by babysitting for a relative or a neighbour or by mowing lawns. Some tutor younger children to earn good money. However, if your child is more interested in becoming an entrepreneur, you can help them set up their business online. More and more young people are starting enterprises these days. You may help them set up their business's online profile on social media and gradually teach them everything they need to manage it after they reach adulthood.
Help children to make smart spending decisions
There's a good chance that children won't grasp why it's worth spending money on something. They're only buying it for the fun of it. Even if the expenditure is justified, we shouldn't expect children to know about the cost-benefit analysis involved. We can, however, impart this knowledge to children and prepare them to put it into practice as adults. Some practical implications of teaching cost-benefit analysis include asking themselves some simple questions:
- How long is the toy (for example) meant to last?
- Is there something else they also want to buy (new sports shoes, e.g.)? Can they decide which one should be prioritised?
They may seem like difficult questions to answer, but it can help children to develop critical thinking skills.
Set savings goals
It's widely understood that saving is important, but our understanding of how to get people to save is still lacking. That is even more difficult with children, as they can be impulsive with money. Although being encouraged to save money is a good way to start, without a reason, it may appear pointless to most children.
According to research, the most effective way to teach children about money management is to use a variety of strategies, such as providing them an allowance, monitoring their spending, and having family discussions about saving and budgeting. If children have an idea of what they want to save for, help them make it simple by breaking it down into smaller, more doable goals. Make sure they know how much time it will take to save up for a particular item if they have an allowance each week.
Teach children how their money can grow
Recent studies show that emerging adults often mismanage their finances due to a lack of financial education. Although the financial basics, such as earning, managing, and saving, are understood by most, the actual cost-benefit analysis is often ignored. Cost-benefit analysis may include topics like inflation, compounding, debt, and using it to your advantage and etc. Granted, these are complicated topics, but they are important as they teach the actual value of money and how to grow it. Parents can still discuss these topics through simple means like using visuals or applying them to their daily activities.
Involve them in your personal finance
There are many ways to involve children in personal finance. A good start would be to open a bank account for their savings and open an investment account on their behalf. You can also get your children actively involved. Start by asking your child what brands or companies they like to get their attention. Children may not know the complexities of businesses, but they are aware of popular brands. Encourage them to choose stocks or funds to add to their portfolio, and you can show them how their investment is doing once in a while. If you do not want to use real money, you can use virtual investment accounts that many brokers and banks offer. Choosing stocks with your kids while they are young will enable them to understand how markets go up and down. Your children will be prepared for the realities of market changes and help them make educated decisions as they become older. You eventually want to allow them to purchase their own stocks with their own money. By the time they are ready to invest, they may have amassed sufficient funds in a savings account.
Instil a habit of saving in children
Chances are that your child spends a good amount of time online, and they already know about Gamestop. Use it as a lesson to teach your child about saving first. Many parents use piggy banks or saving jars as a tool to get their children started. Others pay their children for doing chores to teach them about earning and work ethic. Although these techniques are meant for short-term financial goals, they still teach them to plan out their expenses and savings. But there are additional ways to instil good financial values, and not all of them require you to do anything. For instance, children are very perceptive of their surroundings. Even if you preach good financial habits, your children will eventually pick them up if you do not follow them yourself. Therefore, it is important to set healthy examples for money.
Talk about money with children
Many parents, even to this day, feel uncomfortable talking about money with their children. While parents do talk about saving, spending, and earning, most limit themselves to the basics, and some topics are off-limits, like debt, investment, and family finances. Children are very perceptive and learn pretty quickly. To prevent their children from forming erroneous financial beliefs, parents should spend time talking with their children about money-related topics. Studies have shown that "family financial socialisation" is effective and has a positive impact on parents' children's financial literacy and wellbeing.
Summary
People of all ages have difficulty embracing a mindset for personal finance—though you can change it! Exemplifying the benefits of personal finance to your children will improve the concept and make them more open to the idea. It will never be too late for parents to familiarise their children with personal finance. And if you discover your youngsters motivated and interested in the subject, you can assist them in starting their own business. Educate your children about financial literacy early on and include them in your financial decisions. If kids are taught good money habits when they are young, they are more likely to live happier, healthier lives as adults. It would be best if you gave your child the freedom to make choices and take genuine risks based on their knowledge. Even though kids might lose money, the goal of the activity is to teach them how to invest and the pros and cons of investing. No matter what happens, the experience of keeping track of their assets, making money, and losing money is priceless.
Allowing your child to make informed decisions and take real risks is critical. Money may be lost, but the goal of the exercise is to acquaint children with investing, which includes understanding that investments have benefits and drawbacks. Whatever the outcome may be, the experience of tracking their assets and profiting and losing money is priceless.