Wed. Jun 7th, 2023

What is the best way to educate your kids about personal finance

How to Teach Your Kids About Personal Finance

Educating your kids about personal finance is an essential part of growing up healthy and confident. It also helps them avoid costly mistakes later in life.

The best way to educate your kids is through consistent communication and modeling the behaviors you want them to adopt. Here are some tips for how to do just that.

1. Teach them the basics

The basic tenets of personal finance are easy to learn and can be applied to a variety of situations. Whether you are trying to manage your budget, pay off debt or save for a rainy day, these principles can help you make the right choices with your money.

The best way to teach your kids about financial literacy is to have open conversations with them about money and the choices that come with it. Getting your kids on the same page as you will help them feel more comfortable and secure with the topic as they grow older.

By the time they start school, kids should have a solid understanding of the basics of earning and spending. They should also understand the concept of savings and investing, says Jayne Pearl, an Amherst, Massachusetts-based author who wrote Kids and Money: Giving Them the Savvy to Succeed Financially.

If your child is old enough to earn an allowance, encourage them to put some of it away in a savings account. Several banks have children’s accounts that offer no-fee and no-minimum balances. This will allow them to see how much they can save and build up their balances over time, says Pearl.

As they get older, teach them about credit cards and how to use them responsibly. Show them the bills they’ll receive when they pay off their purchases. They can then see how long it takes to pay off their bill and how much they’ll have to pay each month in interest.

Teach them about comparison shopping by buying different products at the same store and seeing what they cost. This will give them an idea of how to compare prices and quality.

It is also a good idea to show them how to save for something special, like a new toy or a trip. It may seem counterintuitive at this age, but saving for a goal can help your child develop the self-confidence that comes with making smart purchases.

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Teaching your kids about personal finance will be a learning experience for both of you. But it will be worth it in the end when they are grown and ready to take on their own financial challenges.

2. Teach them to save

If you want your kids to grow up with a financial education, it’s important to start teaching them about money at an early age. The sooner they understand the fundamentals of saving, budgeting and spending, the better off they will be financially in adulthood.

One of the most effective ways to teach your children about money is by modeling good spending and saving habits yourself. This can take some time and consistency, but it’s essential if you want your kids to develop healthy financial behaviors from an early age.

Getting your kids to save can be easier than you think, and it’s a great way to teach them about the importance of planning ahead and delaying gratification. Set up a piggy bank, coin jar or bank account to help them learn the value of putting away their money for short-term goals.

Another way to get your child thinking about savings is to give them an allowance. This allows them to make budgets and determine what they need to spend their money on, and it also provides them with an opportunity to save some of it for longer-term expenses like a vacation or new toys.

It’s best to avoid giving your kids large amounts of money at once, since this can encourage them to spend all of it on one thing, rather than a series of smaller purchases that add up to the same amount over time. Instead, offer them small allowances every few weeks to help them save and track their progress.

Then, have them set a goal for how much they want to save. This can be as simple as a few dollars each week or a set amount for a specific item they’re saving up for.

Once they’ve figured out their saving goals, make it easy to reach them. Show your kids how to track their expenditures using a simple spreadsheet or app on their phone, and reward them for reaching each checkpoint.

Finally, teach them about the different types of savings — personal savings, emergency funds and retirement savings. Explain to them why they need each type of savings, and why it matters for their long-term financial security.

3. Teach them to budget

If you’re looking for a simple way to teach your kids about personal finance, budgeting is a great place to start. It’s a skill that can help your children build financial independence and ensure they stay on top of their bills, says certified financial educator Kari Lorz.

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To begin, let them see how you budget and talk about how it works. Explain that a budget helps you to make sure you have enough money to cover your needs and wants and save for the future.

As they get older, encourage them to set goals and stick to them. Teach them that saving is a good way to earn something special, like a new pair of shoes.

It’s also a good idea to teach them how to separate their needs from their wants, says Hale. It’s important to show them that some things are a must, like their weekly groceries, while others are just fun treats they want to have occasionally.

“It’s a lesson that will last a lifetime,” she says. For younger children, start with the basics, such as an allowance or a weekly chore system that rewards them for doing their work.

Next, set them up with a budget spreadsheet or app. These can be downloaded from the Internet and will make it easy for them to track their spending, savings and progress toward their goal.

If they’re too young to use a computer, print them out a few blank sheets of paper and have them write down their expenses, including fixed costs. These may include rent, car payments, credit card bills and other essentials.

A simple three-column sheet should do the trick. It should list the goal, when they hope to achieve it, the amount of money they will earn in that time and the amount they will save for that goal.

Using this method, your child can see how much they are earning and how long it will take them to reach their goal, which will motivate them to keep saving. It’s also a good idea to encourage them to prioritize their spending, and to remind them that they need to save for the things they really want.

4. Teach them to invest

You can help your kids to understand the importance of investing by showing them how money grows over time. You can also introduce them to different investments like stocks and bonds.

If your kids are interested in the stock market, you can help them get started by opening a custodial account with a brokerage. Some brokers, including Charles Schwab, E*TRADE and Fidelity offer accounts specifically for children.

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Other investment options include mutual funds or individual stock accounts that your child can use to buy shares of their favorite companies. Many popular brands have fractional shares that allow you to buy a small amount of shares, and your child can watch their savings grow over time.

One of the best ways to teach kids about investing is to have them play an investment game. Monopoly is a good starting point, but there are plenty of other games that can teach your kids about investing as well.

You can also introduce your kids to the concept of risk by letting them invest some of their own money in bonds and stocks. Explain that these investments come with different levels of risk and return, so it’s important to understand your child’s risk tolerance before they begin.

Your kids can learn the basics of investing by playing games that involve them tracking their investments and analyzing their portfolios. For example, the SIFMA Foundation has a Stock Market Game for kids that allows them to trade a virtual investment portfolio and track its performance.

The key is to make it fun and easy for your kids to understand the process. Instead of talking about volatile stock prices or the benefits of mutual funds, start with something they can relate to – like buying shares of their favorite brands.

Teaching your kids to be smart shoppers can also be a great way to help them build good financial habits. Show them how to compare prices and quality to make wise purchases.

Educating your kids about money is a fun and valuable part of raising them to be responsible adults. Teach them to budget their money, save it and invest it wisely so they can grow their wealth over the long term.

Jeffrey Augers
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By Jeffrey Augers

Jeffrey Augers is a highly skilled and experienced financial analyst with over 12 years of experience in the finance industry. He has a proven track record of delivering exceptional financial insights and recommendations to clients, empowering them to make informed decisions and achieve their financial goals. Jeffrey holds a Bachelor's degree in Finance from the University of Michigan, and an MBA from the Wharton School of Business.