8 Lessons on Financial Literacy for Your Children

Parenting is an adventure without a manual. Parents are somehow supposed to instinctively know everything needed to teach and raise children to be tomorrow’s leaders. Unfortunately, parenting skills are limited to personal experiences and those you might have observed from friends or family members.

One of the key skills that get missed is deliberately building a strong foundation for financial literacy very early on with your children. The financial “Life Lessons” can be incorporated into everyday activities, which will instill strong money management skills in your children.

What Is Financial Literacy?

Often financial literacy covers things like opening a bank account and buying stocks. While these are noble financial skills, everyday money management is more critical to their financial success. If your child spends every dollar they earn and more, there will be no money left over for those great investment opportunities.

For purposes of this post financial literacy is focused building responsible spending and saving habits. When these skills are mastered, children will be able to live within their earnings, save for a rainy day and prepare for future expenses.

Key Practices That Lead to Financial literacy

1)    Have money discussions early and often. Talking about your child’s performance in school and sports is a natural conversation. When you begin to talk about money on a regular basis, it will also become a natural part of everyday conversation. Finances should be taught as the opportunity arises, rather than in the form of lectures on how to spend or not spend money. Lectures can lead to negative feelings about money.

For example: when shopping you may talk to your child about why you chose to spend money a particular way. Was your decision based on price or quality? Was it on sale? Did you need it or want it? This conversation will help them understand how to evaluate spending decisions.

2)    Tailor discussions based on age and understanding. One of the challenges with money is that it can be difficult to comprehend. Using concrete examples and personal experiences they can relate to will make a stronger impression than abstract discussions.

For example, if your child saves money for a toy and the toy breaks in the first hour, it is an opportunity to talk about value versus costs. For older children, those conversations may be an evaluation about whether the newest smartphone is worth the cost based on the new features that have been added.

3)    Money has value and is finite. There is a certain amount of money available each paycheck. When the money is gone, there is nothing left to spend. Children often are unable to weigh the value of an item versus its costs, which can lead to poor spending decisions. Paying your child an allowance and giving them spending choices and earning opportunities will help them understand the value of money.

For example, younger children can struggle with the concept of where money comes from. Using cash will help them “see” the money, how much is available and how much is left after a purchase. When using debit and credit cards, it can appear that money comes from thin air. For older children you can teach the value of money by equating it to an hourly rate. If your child is earning $8 an hour and they want a $100 item they can decide if it's worth working 12 ½ hours for it.

4)    Wants Versus Needs. Advertising is fierce and it is the advertiser's goal to present everything as a “must have.” Helping children decipher wants and needs will help them prioritize spending.

For example, talking about ads and commercials will help children think critically about what they see. If they want an item, talk about what value it has and what need it fills. Sometimes creating a chart and separating the wants and needs is a more literal way for them to see where their money should be spent.

5)    Set financial goals. Goal setting gets a bad rap because goals are often hard to accomplish when a plan is not established. It is also a good practice to tell children you are not buying an item because it is not in the budget, rather than “I can’t afford it.” When an item is not in the budget you have a greater sense of control.

For example, as children earn money break it down into spending, saving, and donating categories. This can easily be done in jars or envelopes so they can track the “accounts.” The child can prioritize their goals and build responsible spending and savings habits. There may be times when they save up for something that breaks or doesn’t meet their expectations. This is part of the learning process and will help them make better decisions over time. For parents, that means resisting the temptations to “fix it” when mistakes occur.

6)    Practice makes perfect. Small money matters result in a small cost for mistakes. As the child gets older, those mistakes can become more important and have more significant consequences. Your children will learn from both their successes and failures.

For example, if they chose to purchase one thing and then don’t have enough to get something else, they should wait for the second item. This teaches valuable skills about the natural consequences of spending decisions. If you buy the second item for them the need for instant gratification grows and they may later feel taking on debt to get what they want today is necessary.

7)    Money is a vehicle for reaching goals not a measure of worth. When a child feels they must “show” others what they have, it can be tied to self-confidence and self-worth. Parents can promote the money and worth connection if their financial habits support and reflect this belief. Money in itself will never make anyone happy. It is, however, a resource for accumulating “stuff” and creating wealth.

For example, being able to get the education needed to qualify for a job you will love can make you happy. Financing the education with money makes that goal a reality. The money itself, if spent on something else, would then not be available for educational purposes.

8)    Monitor your own perceptions and relationship with money. You have certain feelings about money based on personal experiences. If you are not where you want to be financially, you may need to change how you think about money. Your spending habits are an example. If you go on a shopping spree when you are happy or sad, they will learn that is the way to deal with those emotions.

For example not everyone who is rich is lucky and not everyone who is poor is lazy, yet these are common perceptions about money. If you teach your children that wealth is created from strong financial management and good decisions they are more likely to see success and wealth as coming from hard work rather than luck.

Financial literacy can be one of the most important things you teach your children and will have one of the largest impacts on their lives. Understanding basic principles and having a lot of opportunities to practice these principles can lead to habits that will last your children a lifetime.

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