The recent recession reminded many families about the importance financial management. It also made it obvious that no child is too young to learn how to manage their finances. The mortgage crisis is a great example of what happens to people who don’t have enough financial information – many people signed mortgages they could not afford or that had terms they didn’t understand that caused problems later. That is why it’s very important to teach the next generations about how to not only spend money, but also how to make it work for them. Here are five ways to effectively teach your children or young relatives about money management.
Teach your child how to save.
The piggy bank is the most familiar way to teach saving but there are other creative methods you might use. Saving is the most reliable way to build wealth. However, saving fell out of fashion as consumer spending increased through the late 1990s. The national savings rate fell from 8% in the 1980s to 1 % by the end of the 1990s. However, the good news is that savings rates in 2010 are almost back to 1980s levels at 6%. One reason for this increase in savings is because the lack of credit has reminded consumers of good saving habits used by their parents in similar hard times.
There are several ways to teach your children that saving is important, such as delaying the purchase of toys and other items your child wants by having your child find out the price and setting a savings goal for their allowance.
Another great teaching method is to start a good behavior or chores piggy bank. Each time your child does something well at home or school, place some money in a piggy bank. It will promote good behavior and show your child the value of saving over time as they see their earnings grow.
Finally, you can also take your child down to the bank and have them open a savings account. Many banks have special savings accounts for children that have no minimum deposit or fees. Whenever your child receives money for birthdays or holidays, you can have them deposit it in the account so they can see their savings grow and how much they earn from interest.
Teach your child how to budget.
Budgeting is something that even adults find difficult, but if your child learns this concept early, it will become a lifetime habit. Teaching your child how to budget isn’t hard either. Have your child make a list of the things they most often spend their money or allowance on. Then, have them list the things they feel they need to buy in order of importance. You can help them find the prices of the items they buy and add them up to see what they generally spend. This is the beginning of a budget. From there, help your child divide their allowance in a way that allows them to buy the things they most want and at the same time leave money for savings. If there isn’t enough for both, work with your child to see what they can cut out or limit in their spending.
Teach your child about investing.
A Norris study in 2008 found that, for Americans making over $10 million, only 19% of their wealth came from a paycheck or income. That means that a majority of their wealth came from investing. Investing in government bonds for your child is a good way to start talking to them about investing. You can also have them look at the paper (or Yahoo Finance) with you in the morning and let them choose a few stocks to look at. Each morning, they can see the change in price of that stock each day and see how much they would have earned or lost.
Teach your child to compare prices.
A simple way to save on the things you want and need is purchase products when they’re on sale. Teaching your kids to look for great deals and compare prices is an invaluable lesson. A great way to start is with breakfast cereal. The next time you’re at the grocery store, take a look at your child’s favorite name brand cereal and compare it to the similar store brand. Have them compare the prices and try the store brand so they can see it is almost identical. They will learn it is possible to get their favorite food at a lower price. In many cases, the two cereals are even made at the same place! If there is not a store brand available, see if there are any coupons that you can use to save on any of their favorite foods.
Teach your child how to save for big purchases.
A good way to start teaching your child to avoid abusing credit is to show them how to save for big purchases. Rather than use your credit card for their next video game or larger present, set up a savings plan for that item and mark it out using a chart or table. They will get a sense of accomplishment and learn that most items are affordable if you plan out how to buy them. For older children, you can even take this a step further and explain the amount they would save on interest if they had charged this instead of saved for it. This extra money could be put into their savings account.
Teaching your kids about money will make them better able to deal with it in both good times and bad. It will also give them the skills for success when they are old enough to teach their own kids. What techniques did you use to teach your children about money or what did your parents use on you?