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We are becoming an increasingly cashless society. And where we once taught our kids about money by “saving their pennies” in a piggybank, pennies have disappeared. Eventually, so will nickels, and possibly dimes. As society transitions increasingly to cashless transactions, parents have a bigger challenge than ever in teaching children the basics of financial literacy. After all, you can’t stuff a debit card into a piggybank. So how do you impress upon younger children the principle of “value” – the idea that the things you buy don’t just magically appear? Fortunately, there are some basic principles that never change. And the sooner you start teaching these to your kids, the sooner they’ll become financially literate. Here are three foundational money principles children should learn.
Even if you only use debit and credit cards, your children need to have a basic understanding that the things you buy cost something, that you use “money” to buy them. The important concept to get across is that there is only a limited amount of that money they can spend. And that goes to the essential concept of “value.” Young children especially are accustomed to instant gratification, which is only natural. As children gets older, however, they can begin to discern the difference between instant gratification and deferred gratification. So that means reinforcing your child’s ability to make choices and set priorities. With that process also comes the need to begin instilling a sense of financial discipline.
You can help your child to become financially literate and develop financial self sufficiency by by teaching them that “money” has many uses and purposes. For young children, money is a way to gratify a particular want instantly – say a candy bar or ice cream cone. But kids can soon learn that they can also defer gratification by saving money for something they cannot buy instantly. Later, this concept will be used to teach older children about investing money to make it grow.
For younger children, this can be a game involving two piggybanks – one for “saving” and one for “spending.” Money from allowances and gifts can be divided into those banks, and kids can total them regularly to see progress. Introducing the concept of “accounts” with their statements, deposits, and withdrawals will come as a natural progression from this. But parents must take the lead here as children get older.
There are plenty of resources for parents to turn learning about financial literacy into a fun and engaging experience for kids of all ages. These include online games and activities, as well as store-bought physical games, such as “Monopoly” for older children. Other tried-and-true methods include contributing to household chores and being paid for their “work,” and for older kids, developing a budget, to help them distinguish between needs and wants.
Children older than about age five will begin to learn to differentiate between what they want and what they need. Communicate with your kids about the real cost of things they want.
Help your older children create a simple budget. If they need a new pair of jeans, ask whether they really “need” that pair of brand-name designer jeans at $150? Or is that just a “want”? It may well be over and above their monthly clothing budget, and they’ll soon see they have to save up for it. But it’s important to make these goals achievable in a realistic timeframe.
Help your kids look at and understand account statements regularly. Show them where their spending decreases their balances. Show how it might be better to cut back on some impulse buys and instead save up for some that more expensive item at the end of the month. This is essentially the first step to teaching kids about the importance of setting goals and saving to achieve those goals.
It’s essential that your children be financially equipped and literate before they experience an unexpected event or emergency situation as adults. Giving your kids the tools to understand money and value, and to govern spending and saving early on in life will give them a decided advantage when it comes time to strike out on their own.
Financial literacy is an educational process requiring patience and discipline from parents. While some elementary and secondary schools are offering financial literacy as part of their curricula, your kids should put what they learn to use in a practical way. And in this case, there really is no place like home.
Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 416-828-7159, or by email at rthompson@castlemarkwealth.com for a confidential planning consultation.
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The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned are illustrative only and carry risk of loss. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.
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