It’s never too early—nor too late—to set a good example.
It’s amazing how young our children are when they begin learning about money. It usually begins when they experience a strong desire for something, such as an ice cream cone or a rocket ship ride at the mall. Now that school is out and summer is upon us, you have a prime opportunity to teach your children about the basics of money and finance.
Given that most American adults are saving too little of their paychecks and bankruptcy filings are at an all-time high, we need to focus on the next generation’s financial education now. One might think it would be easy to cover these basics with our children, but in reality, it can be difficult. Unlike athletic or music skills—for which some people have a natural gift—we know that money-management skills come only with time and experience. Children can and do learn from their parents. They will emulate your actions as they grow, so it’s important that you set a good example. This will teach them how to apply the basics, and will establish positive habits that will benefit them throughout their lives. Remember: It is never too late to set a good example.
An allowance is the best way to begin teaching your children about money. How they earn their allowances is a subject that could fill an article in itself, but if you keep in mind that you are trying to teach money management and not merge other complexities into this behavior, you’ll be more successful in teaching them how to budget and make smart decisions with their money. Let’s take a look at what I call the three S’s:
- Savings—putting some aside for the future
- Spending—learning to live within their means and being educated consumers
- Sharing—being charitable and generous to others.
Start by setting up three jars or envelopes. Together with your children, decide upon a weekly deposit amount for each. From here, you can begin to apply the three S’s.
The concept of savings is paying yourself first. Even young children are able to understand short-term goals, so this is a great way to motivate them to save for a new toy or those special shoes. Start with these short-term goals and extend them as your children get older. Once they’ve accumulated enough to open a real savings account, take a trip to your local bank and teach them how to make deposits. Review the bank statements with them each month and explain how they earned money on their savings with interest. This is also a good opportunity to teach them about FDIC insurance and how banks loan money out to make more money. Once they have enough to purchase a mutual fund, begin with a no-load mutual fund and use it as a tool to teach them about risk and return.
Use this concept to teach your children how to be good consumers, but also allow them to make mistakes so they can learn. Take your children shopping with you and explain the prices of products and their actual value. Why does this jar of peanut butter cost 50 cents more than the other one? What do you get for your 50 cents, and is it worth it? This is your chance to teach them smart shopping strategies.
What a great way to help your children learn values! Have them identify a charitable organization that they personally feel is important. If possible, have them visit the organization to see how their money is being used and what effect it is having.
Financial matters can become complicated very quickly. Children who learn the basics will have an advantage later in life when dealing with mortgages, loans, credit cards and leases. One of the best things you can do for your children is to prepare them for life on their own. The sooner you start preparing them for the “real world,” the better. iBi
Daryl Dagit is a financial advisor with Savant Capital Management, located at 7535 North Knoxville Avenue in Peoria. For more information, visit savantcapital.com.