A common complaint from young adults and high school graduates is they don’t know how money works. It often sounds something like this: “I can tell you about Pythagoras Theory and write essays on Shakespeare all day long, but I don’t know how a mortgage works.”
Teaching your children how to handle and save money may be the most important lesson you can teach them. Especially if you have significant savings they will inherit from you.
The way you approach these lessons will depend on the age of the children, but the key lessons are the same. How money or transacting works, how to save and plan, how to manage spending, and how to protect what you’ve saved.
The common mistake many parents make in every part of life is assuming the child already knows what is right and good, what is a genuine statement, and what is sarcasm. Parents never show or tell their children the difference between these concepts because they simply don’t think about it. The same goes for good, sound financial habits.
Set a good financial example. Because no matter the age of your children, your actions will always speak louder than words. You may tell your child they need to save money for something important, but if your child grows up watching you spend money on seemingly unimportant things, then they will follow that example instead.
The financial world can seem incredibly boring and dry, especially to children, because they don’t need to be part of it yet. Whenever you can make money interesting to them, they will want to learn more about it, especially if it can be a positive family experience. Here are some ways to approach financial literacy depending on your child’s age.
For pre-school age children, the concepts should be kept very simple, and as visual and physical as possible. When your child wants you to buy something for themselves, instead of adding it in with your things, give them the money, and let them pay for it. Playing games can be a good way to get them to engage with abstract ideas like fair exchange of goods and services for money or assets of the same value. This is also known as fungibility!
For example, you can trade jelly beans (or some other sweet) and give them values based on which flavours you both like or dislike. If greens are worth two and reds are worth one, then they can trade two reds for a green.
The primary school child can go a little deeper into how money actually works, and the history of finance could be an interesting topic to explore together.
You could also introduce the idea of foreign currencies and exchange. Coin collecting could be another fun hobby, and it introduces the idea that demand could influence value. For example – first pressings of some coins are far more valuable to collectors than their face value.
Encourage them to start a simple business of some sort, and teach them about profit and loss.
This is also a good time to open a bank account for your child, and encourage them to save money so they aren’t tempted to spend it. You can identify something your child really wants, and encourage them to save up to buy it. This is good incentive to help them to start becoming disciplined in putting money away and not using it.
By middle school, most children are using money, and they understand how it works.
Give your child the opportunity to do things for you or other family members in exchange for payment because by now, their demand for money has probably outgrown its supply. You want to instill the understanding everyone earns their money, and no-one is simply given it for doing nothing.
Avoid impulsive buying.
If your child plays video games, try and point out the economic aspects. Some games, especially online games where in-game items are traded between players, can have thriving internal economies. They can be a very powerful teaching tool, especially for children who show little interest in the real, offline world.
Teenagers often have a genuine interest in money, but usually, as a means to an end.
High school can be challenging for parents and for children. Teenage culture, particularly amongst the older teens, is materialistic and focuses strongly on image. Teenagers generally want to impress each other, so their behavioural posturing is reinforced by the need to buy status items to feel worthy of their peers’ esteem. This may present a challenge to the saving ethos you have been nurturing in your teen.
On the other hand, teenagers tend to value money they have earned themselves more than money handed out to them by their parents. Summer holiday is a great time for your high school child to get a “real” job. It can be a way for them to begin to gain some sort of independence or at least a feeling of it.
At this age, it’s important to introduce more responsibility, and the conversation about further education is a great opportunity for them to take a more active role in planning for their future.
If you have the means, open a trading account for your child and match their investments. This provides them with a good incentive to invest, and it’s an opportunity to bond over a common goal. Alternatively, introduce them to your financial planner or to us, and let us engage together in building them a simple financial plan – setting some goals, understanding taxes, setting up a savings plan, and investing for the long-run.
Once your child leaves home, they will probably need your advice more than ever. They may not want to hear it, but student loans and credit cards should be avoided as much as possible. They are debt traps, which can become a massive financial setback, and most people take years to recover from these sorts of debts, if they recover at all.
Your child might also need advice on buying a house or applying for business finance. Even events like weddings and having a baby require a certain amount of financial literacy, tempered with foresight. Sometimes, you might not have the answers, and then, you should introduce your child to a financial planner, who will be able to answer questions and give sound advice when you can’t.
Whatever age your child is now, expect you will still be teaching them about the world long after graduating from school or college, and that’s okay. As long as you have the knowledge to give, and your child is willing to listen, you should offer a helping hand. Knowledge and literacy of any kind, but especially financial literacy, is the gift that keeps on giving.