Most parents want their kids to have more opportunities than they did. But for all the hard work and sacrifices parents make to give their kids every possible advantage, most of us fall short when it comes to teaching kids basic financial literacy.
Regardless of your own level of knowledge or interest in money, you can instill financial literacy in your kids, simply through your words and actions. Here are four ways you can make your kids more money savvy, starting today.
Talk about money openly. Money remains one of the last taboo topics. Look at politicians. They’ll talk openly about race, religion, abortion and immigration, but get prickly when the topic of their financial lives arises. But like any issue involving shame, swiping the topic of money under the rug creates bigger long term effects. In fact, a study by T.Rowe Price revealed that 46% of kids whose parents talked about money openly felt they were savvy in the area of personal finance–even when some of those conversations were parents arguing over money. Just 14% of kids whose parents didn’t talk about money in front of them said they felt money savvy.
Give them an allowance. Kids who have the opportunity to earn money develop an inner work ethic, and sense of confidence regarding their value. Nearly 40% of kids in the T.Rowe Price survey who got an allowance said they were smart about money.
Let them make bad choices. The temporary nature of money becomes apparent when you’re responsible for paying for your own rent, food and bills. But if you don’t learn how to make financial choices based on the money you have, earn and owe, the stakes are high and can have lasting consequences. Let your kids choose how they’ll spend their money–even if you don’t agree. When kids are empowered to make decisions about how they will earn, spend and save, they learn lifelong lessons about the consequences of choice when it comes to money, in a low-risk environment.
Explain price tags, and relative value. Kids who are as young as five years old can grasp the concept of comparison. Just as three apples are more than two, they can reasonably understand that an item that costs $5 requires more money than one that costs $4. When you take them shopping, explain price differences and why they matter, including the fact that sometimes packages make you think you are buying a “better” item, when it’s actually the same. Invite kids to participate decision-making processes of what you buy. If you disagree with their choices, explain why. These money lessons may add a few minutes to your grocery trip–but can make kids better critical thinkers about money for their whole lives.
As bigger ticket items like bikes, cars and college applications become part of your child’s financial reality, discuss price tags, value and choice with the same level of transparency. If your teen wants to buy a car, for example, discuss a reasonable price tag and how you expect him or her to earn the money to pay for part or all of it, including how to budget for the costs of gas, repairs, and insurance.
When kids are ready to complete college applications, compare college prices along with their choice of major or career. While money shouldn’t determine education or professional decisions entirely, viewing them the lens of financial reality can help kids understand the impact of their choices, and sacrifices those may require. To manage student loans, for example, many experts recommend not borrowing more than one can reasonably expect to earn the first year in the professional world. With that in mind, you and your child can discuss if it makes financial sense to take some general classes at a local community college, to consider various housing options, or to secure a part-time job while they’re enrolled in school.