As parents, we have a duty to raise our children well by teaching them valuable life skills and good morals. This responsibility can feel overwhelming, as raising children is likely the hardest task you’ll ever undertake.
However, it is also one of life’s greatest blessings. According to a study conducted by Pew Research Center, 88% of parents say it is extremely important that their children become financially independent and find jobs and careers they enjoy.
This data highlights the significance of teaching your children about creating good financial habits and managing their finances effectively from a young age.
But where do we start?
Continue reading as we cover when to get started, how to get started, and what topics and methods to focus on to ensure your children are on the right path to financial success.
While children vary in their development timelines and learning styles, a good rule of thumb is to start introducing money management concepts between the ages of 5 and 7.
If they catch on quickly, that’s a good sign. If they struggle to understand, wait and try again later.
The key at this early stage is to encourage fun. Learning should be exciting for your child, so use their enthusiasm as an indicator of effectiveness.
Teach the Importance of Delayed Gratification
In an age of smartphones, social media, fast food, and other forms of instant gratification, it’s easy to get used to having everything now instead of waiting.
Driving home from work and your stomach rumbles? Just swing by Chick-fil-A and grab a quick chicken sandwich. Financially, succumbing to instant gratification can be dangerous.
Don’t have the money in your bank account for that flashy pair of shoes? Just swipe the credit card and worry about it later. Can’t afford that new limited edition sports car? Just take out a car loan.
Instant gratification is the tendency to discount a future benefit for a less rewarding but immediate benefit. Habitually surrendering to this temptation often leads to addiction and other issues.
Teaching your children delayed gratification doesn’t have to be complicated. It doesn’t even have to be related to money, although making the connection with money can help solidify the concept.
One way to promote delayed gratification is to celebrate when a goal is reached. Children love when you recognize and praise their achievements.
Start by asking them what they want. Help them get specific. Once you both understand what they want, assist them in creating a plan to get it.
Keep it simple and achievable so they understand and stick to it. Make sure the plan is dependent on your child’s actions, rather than on others.
Don’t give up, and when your child reaches the goal, celebrate and let them know how proud you are.
Another great way to teach delayed gratification is to use the Share, Save, Spend formula developed by Nathan Dungan, author of Prodigal Sons and Material Girls: How Not to Be Your Child’s ATM2.
For each dollar your child earns, place a set percentage into three jars labeled Share, Save, and Spend. This method provides a visual representation of saving a portion of income and its positive impact, while also promoting sharing with others.
Teach the Importance of Saving and Investing
Learning the importance of saving and investing at a young age can have a tremendously positive impact on a child’s long-term finances.
This is especially true because of the power of compound interest. In investing, time is your best friend, and children have a much longer time horizon than adults.
An idea for teaching this concept is to pay your child interest based on their savings. Keep it simple.
For example, each month, you could pay your child 5% of their savings. If they have $50 saved, you would pay them $2.50. If they have $100 saved, you would pay them $5.00.
You might say: “At the end of each month, I’ll pay you $0.50 for every $10 you have in your piggy bank.” Adjust the terms accordingly, but emphasize that the higher their savings, the more they earn.
Although the concepts of saving and investing can be difficult to grasp, start small and focus on the basics. Make it fun, and celebrate even the smallest successes.
When to Use and When Not to Use Debt
When used correctly, debt can be an excellent tool for building wealth and increasing liquidity. Used irresponsibly, however, debt can be disastrous for your finances.
Many people with bad experiences with debt tend to believe all debt is bad. There is bad debt, such as overspending with credit cards, personal loans, or buying a car you can’t afford.
This debt doesn’t provide any return once the money is spent. You have the debt, but nothing to show for it.
Conversely, there is good debt, which offers a return on investment or leaves you in a better position once paid off.
This could be purchasing a rental property, buying a used car to rent out, taking out a business loan, or borrowing money for education. The most common example is a home mortgage, although any debt should be affordable without putting too much stress on your cash flow.
For your child, this could be as simple as borrowing money to start a lemonade stand or to purchase a used lawnmower and start mowing lawns in the neighborhood.
Instead of teaching your children that all debt is bad, teach them how they might benefit from good debt while avoiding unnecessary bad debt.
Charitable Giving – Helping Those in Need
Everyone needs income to purchase necessities, and no one ever complains about having too much. But money itself won’t bring happiness or fulfillment.
One way to use your income to help others and provide a sense of fulfillment and joy is through giving. Donating money to people in need and seeing the positive impact it has is one of the most fulfilling things in life.
Even if you don’t have much extra money, you can still help others by giving your time. Sign up to pack meals with your child for Feed My Starving Children (FMSC) or sort toys for Toys for Tots.
This not only teaches good values but can also be a fun way to spend quality time together as a family.
Based on how their brains develop, kids don’t grasp the concept of sharing until around 3.5 to 4 years old. So, depending on your child’s age, if they’re having a tough time understanding, wait awhile and try again later.
Be a Good Role Model for Your Child
Likely the biggest impact on your child’s development isn’t what you teach them directly, but what you teach them indirectly by your actions.
Leading by example is your greatest tool in shaping your child’s development. Kids are like sponges – they soak up everything, whether good or bad.
We all make mistakes, and perfection isn’t what matters – what matters is how you respond. When you make mistakes, be open about them to your children, and let them what you did to fix the issue.
Children are not perfect either, so instead of expecting perfection, show them how to react and learn from their mistakes by doing it yourself.
Conclusion
As parents, we all want the best for our children. When it comes to finances, there is a lot you can do to steer your child in the right direction and help them build good habits and values that will benefit them in the future.
Using these tips can help you set the stage for your child’s success!
References
- Pew Research Center. “Parenting in America Today.” Pew Research Center’s Social & Demographic Trends Project, 24 Jan. 2023, www.pewresearch.org/social-trends/2023/01/24/parenting-in-america-today/.
- Dungan, Nathan. Prodigal Sons and Material Girls: How Not to Be Your Child’s ATM. John Wiley & Sons, 2003.