Unfortunately, many of us learned next to nothing about personal finance in school. If you have children, it is up to you to teach them sound money habits that will stay with and serve them well throughout their lives.
It’s almost never too early to start teaching children about money. Sure, your 3-year-old isn’t going to understand much about investing in an IRA. Surprisingly, 3 is still the right age to start teaching kids simple money management concepts! A recent study proved that by the age of 7, a child’s ideas about money are already in place. At this young age, children will see your actions and copy them. Make sure you interact with them when you are spending money. A simple thing can be letting them help you make a shopping list when you go to the grocery store. You can explain that you make a list because it helps you stick to buying only things on the list. You can further elaborate by explaining that while you do have money for groceries, you need money for other things too such as paying your mortgage payment or rent and the electricity to keep you cool or warm. If you buy too many things not on the list, you will not have money for those other things.
This, So Not That
Gift-giving holidays are a good time to explain choices. Ask your child to make a list of five things they want for the holiday. Explain that because you need money for other things, they have to choose three out of the five things on the list. Even very young children can understand choices. If you want this, you have to give up on that. We can’t have everything we want because we only have so much money to spend. So, we have to choose which things are most important to us. At this point, your child might be making a choice between what birthday present she wants, and in the future, she will be choosing between that new car or starting to fund an IRA for her retirement.
It’s a good thing for children to have some money to do whatever they want with. This Is one of the best ways to learn about money. However, it is not the best idea to just let them spend it all as they see fit. There is a great method for dividing up allowance called GISS – give, invest, save and spend. The allowance is split into those four areas. Give is for charitable donations, invested money can go into something like a 529 college savings account, save is for a larger purchase the child wants like a bicycle and spend is for the child to spend on anything she wants.
Many of us don’t use cash because we often don’t carry it. In fact, your kids may have never seen you use cash! It is important to use it from time to time so your child – especially young ones – can see a concrete example of how it is used. When kids only see you insert a card into a chip reader, it can be difficult for them to understand what happened. Cash is tangible in a way that a plastic card is not. Kids don’t know about credit card limits, but they can understand that when you have no money left, you have nothing left to spend.
If you have children, see if you can implement some of the above to help them start understanding how money works.
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