These tips will help you find a balanced approach to financial literacy education
Psychologists advise teaching financial literacy from an early age so that a child treats money responsibly and wisely as a grown-up. However, many parents barely understand basic financial concepts themselves. At least half of the global population are still struggling with money management and need financial guidance themselves.
Therefore, well-to-do parents go to extremes such as paying kids for every household chore or giving bank cards to toddlers. On the other hand, families with financial problems value every single dollar, and they may not give pocket money, even to teenagers who already need it.
1. Start early but don’t rush
Behavioural researchers from Cambridge University encourage parents to start teaching their kids about money as young as 3. However, that doesn’t mean giving pocket money or a bank card yet. Leaves, pieces of paper, or plastic tokens can help with illustration at the beginning. There are developmentally appropriate ways to help your kids begin to understand how finances work. Preschool children learn while playing, so you can choose games connected to finances: going shopping, putting small change to a piggy bank, counting money, borrowing things, playing money-related board games, etc. There are plenty of children’s books and apps dedicated to financial literacy as well.
2. Give pocket money
As long as the child goes out unsupervised, they need at least a little pocket money. Usually, that happens when a child reaches school age. Some kids have valid reasons to carry money: they pay for public transport or snacks at the school cafeteria. Others have all of those prepaid, but that doesn’t mean they shouldn’t have any personal finances. Daily or weekly allowances must be regular and steady. It isn’t a salary the child must earn. However, the size of the allowance is individual and depends on your family’s budget and values. Pocket money can help children learn about money management and responsibility, but you can spoil them if you provide unlimited access to your credit card. If you prefer a cashless approach, choose one of the many bank products created specifically for kids. Those have parental control features and strict limits. Remember, that pocket money is personal and a child has the right to make mistakes in spending it. Dealing with consequences is part of the learning process. Nevertheless, before giving any money to a child, you should discuss appropriate ways of using it.
3. Teach to earn properly
Paying children for something is very controversial. One thing is when a child performs a job like delivering items, acting, singing, tutoring, modeling, babysitting, farming, or starring in a video blog. In this case, you can just advise your child on how to do this work best. Another thing is when a kid earns money for washing dishes after dinner. Many parents prefer to lure children into doing household chores or studying with a financial incentive. Thus, they pay for good grades or tidying their room. It may bring some positive results, but the motivation may go wrong. It may even lead to bargaining or blackmailing on the part of a kid who won’t help you for free. Thus, if you do decide to pay for chores, choose something out of the daily routine. Allot every family member several must-do tasks, and pay (if you wish) for doing extra things like gardening, doing spring cleaning, mowing the lawn, etc. The reward should be proportionate to the chore and age-appropriate. Moreover, according to psychologist Edward Deci, monetary rewards should not be given for previously enjoyed tasks, creative tasks, and educational performance. In those cases, praise, high fives, or a promise to do something fun at the weekend could better serve as positive reinforcement.
4. Be a role model
Children are mirroring their parents in most cases. Thus, you need to learn financial literacy yourself. Show a child how you do your budgeting, whether you place cash in different wallet compartments according to weekly needs, or use a sleek app. Tell kids about your work and what you earn money for, or better, take them to your workplace for a couple of hours. Discuss the cases when you take loans or buy something on credit, and show how you pay your debts responsibly. You can also get a savings account on your kid’s behalf and track how the amount grows together. Encourage a positive attitude to work and wealth in general. When you or your child want something you cannot afford at the time, learn to admire and dream, rather than becoming envious or frustrated. You should also look for ways to earn the necessary amount, or get what you want cheaper (during sales, buying a used item, etc). If you set financial goals and reach them, that would be the best example for your children.
5. Explain the difference between wants and needs
Childish stubborn “I want” is a nightmare for many parents who want their children to be happy. A child crying out loud in a toy shop is a familiar scene to most of us. Some prefer to buy whatever their children want just so they stop crying, others insist on teaching a lesson, even if they can afford it. The right approach is somewhere in-between. Of course, there’s no need to satisfy every fleeting desire of your child, especially, if you know, the interest in the toy will vanish a minute after buying it. Discuss what is a “want” and what’s a “need” at the grocery store (i.e. ice-cream vs milk). Make a list of the needs and wants of your family. Explain why each point belongs to the chosen category. Let the child understand that we spend money on needs first to survive, and then buy something from the wish list to make our lives more comfortable and enjoyable. Introduce a waiting period rule i.e. if the child still wants the item in a few days/weeks, you’ll consider the purchase.
6. Keep records
It’s important for a child to see where their money goes to learn proper money management. If they use cash as pocket money, encourage keeping records of all spendings and savings. Especially, if the child tends to spend everything at once and asks for more before the due allowance date. If you use a kid’s prepaid card, the task is even easier. Most apps show all transactions in detail and categorize monthly spending. If a child saves for something valuable, help them to calculate how much they need to put aside every month/week/day to buy the item within a chosen period. Let children keep track of their financial goals. You can even add some more money to the piggy bank monthly to teach what interest is. Of course, if you put children’s money into a proper savings account, the bank will do it for you. However, we would not recommend choosing a certificate of deposit with younger children as their goals are too unstable, and long-term limited access to funds won’t be appreciated.
7. Experiment with investing
Introduce your child to the world of bonds and stocks, (but perhaps learn about it yourself first). You can open a small custodial account at a brokerage which helps to direct the investments. Some children’s financial apps like the BusyKid even allow buying shares of certain companies using a child’s debit card. Don’t play big, just use it as a clear illustration of how the market works. Encourage kids to find out more about the company you want to invest in. Discuss what long-term factors may influence its prosperity. Make sure to also mention its social impact, as investments today become more and more sustainable. Try investing in both stocks and bonds to compare the yields over time. If you don’t have enough money to indulge in such experiments, try virtual portfolio tools provided by various exchanges. Some of those tools even include gamification elements like competing with your friends to see who has the highest profits in hypothetical portfolios you create with fake dollars. MarketWatch and TeenVestor are some of the brightest examples.