Whether your kids spend money like it’s burning a hole in their pocket or consistently save it for a rainy day, having frank conversations about how they earn, save and spend money can be crucial for their financial success later in life.
“As a parent, money is one of the hardest topics to discuss with your kids, but it’s also one of the most important,” said Jennifer Dempsey Fox, a mother of two teenagers and national managing director of wealth strategy for PNC Asset Management Group.
Few schools have formal courses dedicated to money management—and it shows. American teens scored below average on global financial literacy assessments, according to a study by the Organization for Economic Cooperation and Development. If not improved, this lack of knowledge could lead to financial problems in the future.
The solution? Experts agree that as a parent, talking to kids about money is a good start.
Teaching kids the basics of money when they’re young helps them develop a good foundation. Then, when they’re older, it becomes easier to have more nuanced discussions.
These conversations become particularly important when your kids receive money for holidays, birthdays or special occasions and must make decisions on how they will spend – or save – that money.
Saving money can be an abstract concept for some children under age five. However, most children at that age are learning about taking turns and being patient. You can maximize these life lessons by explaining that patience now can help them buy something they want later.
Every time your kids receive money, encourage them to set aside some to spend, some to save and some to share with others in need. Asking them to designate their money in this way helps them think about both their short-term and long-term goals.
It may help to keep their money in clear containers so your child can see it adding up (or dwindling). There also are digital tools to help your child visualize this, such as PNC’s “S” is for Savings® account. Your child can “fill” three jars (saving, spending, and sharing) and see images of coins and dollar bills in the jars.
Giving young children cash to use for small purchases can make a difference. When they have to hand over a dollar for a treat in the checkout line, it teaches them that money is more than just a number. Remind your child that a dollar spent on a treat now means they won’t have that dollar to spend on a toy they have been planning to buy later.
Teenagers typically can handle more planning when it comes to their money, so it’s not as imperative for them to pay strictly with cash. Fox recommends loading allowance or gift money on prepaid cards.
“Paying with plastic means teens have to keep track of their balance and educates them on the modern money system,” she said. Since prepaid cards have a set limit, teens learn to budget their money to make it last.
When teens want to buy something, they can check the balance on their card before making a decision. “This method has prevented a lot of conflict in our house,” Fox said. “I ask my son or daughter if they have enough money to cover the expense and the answer is simple from there.”
If your teen doesn’t already have one, open a checking account for/with them. Keep in mind you may need to be a co-signer on the account if they are a minor. Teach them to use online banking to track and evaluate how they spend their money and emphasize the value of setting aside savings.
As tough as it can be, allow your kids to make bad spending decisions when they’re young – but always follow-up with a lesson.
It's a lot easier to watch them make a bad toy decision for $20 when they are 10 years old than a bad credit card decision for $2,000 when they are 25. If they have to live with a relatively minor bad decision, it will teach them to make better choices with their money next time.
It’s important to remember that every family has different financial needs and goals. Don’t be afraid to try different ways of teaching money lessons.
Once your child is old enough to understand the idea of saving money, introduce them to investing.
“You don’t want to overwhelm kids with too much information. Let them learn a topic and put it into practice, then expand on it,” Fox said. “You can expand on the concept of savings by explaining that investing money is a way to help it grow. Starting small by teaching them to invest and allowing the markets to work can help you introduce investment basics without over-complicating the concept.”
If your child receives money from relatives for holidays, birthdays or graduations, ask them to save a portion each time. You can open some investment accounts with no minimum deposit and gradually build the balance each time your child saves more money. Explain to your child what it means to own shares of a company and reinforce this idea each time they spend money at a company where they own shares.
The type of investment chosen should depend on your child’s goals, so discuss what this money could be used for. A 12 year-old saving to buy a car at 16 might invest money differently than if they were saving for college, due to the time horizon of the investment.
No matter how you choose to invest, talk to your child about the importance of making good financial decisions now that can help them be more financially secure in the future.
A study by the National Financial Educators Council showed 18-24 year olds wish they had been taught money management in school. In fact, 51 percent feel a money management class would have been more helpful than math, science or social studies.
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