Money is a part of our everyday lives, and understanding how to manage money is a skill we all need. Financial education that includes basic money management and how to save money for a secure future should begin at a young age and continue through all stages of life. Few elementary, middle, or high schools offer comprehensive personal finance programs so the responsibility tends to lie with parents.
Research shows that today’s children aren’t getting the financial education they need. A survey of 15-year-olds shows that 18 percent don’t have basic financial skills and only 48 percent of high school seniors scored correctly on a basic financial literacy exam. The way kids learn about managing money is through observation, which means they learn about money matters from their parents. A Cambridge University study shows that kids can grasp basic monetary concepts by age three and their money habits are set by age seven. You can never start your kids’ financial education too early.
Although this task could seem overwhelming, there are some basic lessons you can teach your kids to sharpen their budgeting skills and help them learn personal money management. Many of these lessons can begin early and be built upon as they grow older. Here are a few to get you started:
How much does it cost? One of the first lessons to teach your children is the value of money. Many parents start preschoolers off with a piggy bank or jar to save their money, but that doesn’t provide a connection between money and its value. Help them understand the value of money by showing them what they can do with it. One way to do this is by taking your kids grocery shopping to help them understand what things cost.
Needs versus wants. It is challenging to explain to children the priority of needs (such as shelter, food, and electricity) versus wants. For younger kids, try having them hold the shopping list to show them how items on the list are needed and everything else is a want. As they get older, show them how to put the brakes on impulse buying and how to spend their money on what they need, while setting aside money to purchase what they really want at a later time. For example, if they decide they want to use their allowance to buy candy now, then that money won’t be available for the video game they have been saving up to buy in three months.
Open a savings account. The next step is to move beyond the piggybank and establish a savings account. Getting kids comfortable with credit unions or banks and bank accounts is an important step in learning money management and budgeting skills. Having a credit union or bank account helps kids feel empowered and in control of their money, and it shows them how a bank account serves as the foundation of personal finance.
Earnings and allowance. Whether kids earn money doing chores around the house or are given the responsibility of an allowance, having regular income promotes financial literacy. It helps them understand cash flow and what it will be like to earn a paycheck later. However, the allowance needs to be paid in a precise amount on a regular schedule if it’s going to be constructive.
Consider using electronic payments. As we do more banking online and from our smartphones, consider using electronic payment services to pay their allowance. An easy way to start is by having them set up their own checking or savings account and using electronic funds transfers for their allowance. When your kids are older, you might consider using any number of electronic funds transfer systems, such as Venmo, Zelle, and PayPal.
Teaching basic money management
As your kids get older, you can expand on those financial literacy lessons and help them understand basic money management.
Personal budgeting. Helping them establish a personal budget to manage their own expenses will give them skills that will last a lifetime. Use their allowance or earnings from an after-school job to teach them how to set up a budget and allocate money for clothes, entertainment, and transportation while balancing wants versus needs. This is an ideal time to open a checking account so they have a place to deposit their money and can get a debit card for purchases. Be sure to use account alerts for monitoring so you can help guide them away from overdrawing their checking account. Eventually, you can build on those lessons by helping them create a household budget for college or moving away from home.
Credit and debt. Another important lesson that kids should learn is how to manage debt. One-third of adults under the age of 30 have student loan debt, yet many of these college graduates don’t understand the concept of debt and interest payments. One way to teach kids how to manage debt is to walk them through a credit card bill, explaining charges and interest fees. When your kids are old enough to drive, you might consider helping them with a car loan, but making them responsible for the monthly payments.
These are just some of the ways you can help your kids sharpen their budgeting skills. Help your kids establish a healthy relationship with money, starting with basic financial literacy and showing them how to take charge of their personal finances.
A great place to start is with a free checking account at your local credit union. 1st United Credit Union is committed to promoting financial literacy for all ages, offering a variety of accounts and financial services specifically designed for teens and young depositors.