Parents have been giving financial advice to their children for ages. “Neither a borrower nor a lender be,” Polonius told his son Laertes in William Shakespeare’s Hamlet. As with good hygiene and good manners, most parents strive to teach their children lessons on how to be good at handling money.
“If you can teach your child the difference between needs and wants, how to budget and how to save, your child will know more than many adults,” according to Scott Reeves of Forbes. “But if you get it wrong, your child is likely to join the millions of Americans who rack up huge credit card debt and get stung each month by stiff interest payments.”
In other words, no pressure.
The lives of children who understand money, its value and how to handle it will be far easier than those of children who don’t.
Here are 10 tips for teaching your kids about money, focusing on saving and investing money, so they will grow up and use it responsibly.
1) Encourage entrepreneurial spirits
One of the best ways for kids to learn about money is for them to learn the true value of a dollar. They can best do that by earning money. Once they realize how hard they have to work in order to earn money, they will appreciate its value and not spend it recklessly.
“It also creates a sense of accomplishment,” Reeves said.
Some common ways for kids to earn their own money include mowing lawns, setting up a lemonade stand and walking dogs. These skills can also help kids later in life by inspiring them to start their own businesses.
2) Give them money
This may sound counter-intuitive. Sit down with a child and figure out how much their expenses are. This can be broad, such as food and school clothes, or it can get into details as fine as the percentage of the electric bill they are responsible for and fees for field trips.
Once the figure for what they need is established, come up with a figure for what they want. This can include everything from eating out to iPods and more.
Give the kids the money they need, along with their budget of how much has to be allocated to certain areas. By having a set amount of money and knowledge of how much the things they need and want cost, kids will learn to recognize value opportunities. If they can save some money by buying a less expensive shirt, for example, they can put that money aside for an item on their wish list.
This can be an effective teaching tool because kids can “learn about pricing, brand names and how to find the best deal for the money,” according to Forbes.
3) Teach them critical thinking
While not directly a lesson in money, kids who learn how to think critically will make better decisions when it comes to money because they will be able to consider the short, medium and long term effects of their decisions, as well as plan for contingencies.
One great way to teach them how to plan, strategize and think critically is to teach them chess. Chess is a game in which cause and effect, concrete rules, analysis and planning for different scenarios are all crucial. Chess can also help kids hone their ability to recognize when to take risks and when to play it safe, which is a critical investment skill.
A real life example of this can be found in the story of David MacEnulty, an English teacher who taught a group of inner-city, low-income students in the South Bronx how to play chess. These students went on to compete and win in chess competitions and their critical thinking skills put them on the path to success. The story was documented in the 2005 movie, Knights of the South Bronx.
4) Preparing presentations, part one
If a family is going to make a large purchase, such as a car, appliance or entertainment equipment, involve the kids in the process. Have them do research into what different brands and models cost; which features and options are necessary and which are not; whether rebates are available; and what the best overall value would be. Then the kids should present their findings to the family.
This will get kids in the habit of researching major purchases and comparison shopping. It will also prepare them for investing their money in the future. If such research becomes a habit, kids will be well prepared to conduct due diligence before making an investment when they are older.
5) Preparing presentations, part two
If a family is planning to take a vacation, kids can be involved in this process as well. Have them poll family members to find out which activities and amenities each person wants available at the vacation destination. Also have them do research into which locations are the best value, when the best time to travel is and what deals are available for items such as air fare, lodging, dining and entertainment.
In addition to enforcing the ideas of research and comparison shopping, as with preparing presentations for major purchases, preparing a presentation in planning for a vacation requires that they find a solution that all family members find suitable. This will teach them to compromise, cooperate and prioritize. If a trip to Nova Scotia is the best value, but all family members have their hearts set on sunshine and warmth, then an alternate destination will have to be found.
These research and presentation skills are also critical in starting and running a business. Learning these skills from a young age will help kids throughout their lives.
An excellent way for kids to learn to comparison shop and stick to a budget is through experience. Grocery shopping is one way to give kids this experience. Parents can pay their kids to do the grocery shopping for the family. It will teach kids how to use coupons, navigate sales, stick to a budget, plan ahead, maintain an inventory, satisfy customers and to learn how to weigh cost and benefit. Is one brand of macaroni and cheese really superior to another, for example? And if bananas are consistently the cheapest produce, but no one in the family likes them, are they really a good value?
Kids will have to do their own grocery shopping as they grow up, so why not turn them into experts while they’re young? Families with more than one child can have them team up to tackle grocery shopping.
7) Kids’ best friend
At this time of year, countless kids are asking their parents for ponies. While ponies are not the most practical pets, there are many types of pets suitable for children that would fit within many families’ budgets. Caring for a pet is an excellent way of ensuring that children learn to care for someone else’s needs and be accountable to others. Caring for a pet is also another great way to teach kids about budgeting—they can be involved in helping to plan for the costs of food, veterinary care and obedience school, among other things, and learn how to stick to a budget and prepare for unforeseen costs.
8) Honor roll
When kids are in school, school is, for all intents and purposes, their full time job. With that in mind, parents could have quarterly performance reviews and give kids monetary rewards for good grades, with bigger rewards for harder classes. Parents could also offer benefits for consistent good grades.
This will teach kids that there is value and reward for hard work and prepare them for their careers, when their ability to support themselves will depend on their job performance.
9) Sales and marketing
Kids participating in activities that require fundraisers often end up having to sell cookies, candy bars, wrapping paper and a variety of other items in order to raise money. Many parents take order forms with them to work and sell on behalf of their kids. While this supportiveness is a nice gesture, kids can learn to do it themselves. Parents could bring their kid into work and have the kid sell their wares themselves.
In the real world, everyone is in the business of selling, whether it’s an idea, a product or themselves, such as when interviewing for a job or raising funds for a new business. Teaching kids the business of selling at a young age can help them as they grow up and it becomes a requirement.
There is also the added bonus that many people are more likely to say yes to a kid than to a parent, so this could even help a child to be more successful at fundraising than they would have been had their parents been selling on their behalf.
10) Extra credit
Parents can act as creditors for their kids. The average American household has $8,400 of credit card debt and pays $1,200 of credit card interest per year, according to Bankrate. If kids learn how to use credit properly, they can avoid this sort of fate.
“Tell them that credit is a privilege, not a right, and that if they abuse it, they will lose their ability to get more,” CNN Money said.
Parents can provide a revolving line of credit to their kids. As the child responsibly uses their line of credit, they can be rewarded with increased credit limits. If the child doesn’t pay their balance off each month, they will quickly learn the consequences.
“Limited use of a credit card will underscore the importance of staying within a budget, and your child will quickly understand that the late-payment charge is money down the rabbit hole,” according to Forbes.
There are countless other ways for kids to learn about money and for parents to teach kids about money. Financial responsibility is crucial for every child’s future. It would be far better for kids to learn these lessons from a young age, under their parents’ supervision, so that they do not make mistakes in the real world.
Parents should talk with their kids about finances and come up with the best strategies to use with their children, considering their knowledge, skills and age.