It is no secret that having good financial habits from an early age is important to developing money-smart kids, who grow up to be financially independent and savvy adults. However, teaching children of all ages, from as early as toddler age and beyond, to be frugal and save money can often be a tricky task. This article aims to provide helpful tips on how to raise money-smart kids, covering potential money-saving tactics, advice on teaching children through example, and ideas to explain money to kids in an appropriate and understandable way.
Importance of Teaching Our Kids How to Save Money
It is essential that children understand the value of money, learn how to save and budget, and develop good financial habits from an early age. Having a better understanding of money will help them have a better financial future as adults. Money-smart kids are in a better position to make more prudent decisions as spending and using money as they get older, such as with credit cards and loan repayment.
Ideas for Raising Money-Smart Kids
- Create a Savings Plan
If your child is old enough, helping them create a savings plan and budget can encourage both responsible saving and spending. A savings plan provides your child with a goal to focus on, and encourages them to save for something in particular, such as a special toy or a piece of clothing they have their eye on. Having something to work towards can also instill a sense of discipline and self-control when it comes to saving.
- Encourage Automating Savings
You can set up a bank account, or an app-based account, for your child to focus on saving. Automating their savings can help them save over time without having to think much about it. As your child deposits money into their account, such as cash gifts from family members, automate the account so a percentage of their money is automatically saved, allowing them to grow their savings without trying.
- Promote Saving Instead of Spending
Whenever your child receives money, such as an allowance or cash gifts, encourage them to prioritize saving over spending. Instilling the concept of saving money instead of spending it on something they want that day is an important concept children should learn early on.
- Instill the Value of Money
From an early age, established the idea that money is precious and should be treated with respect. Store any cash physically away from where your child can access or get it, or if possible, put it into a savings account at a bank or an app-based account.
- Use Cash Envelopes
Using a cash envelope system is a great way to have your child monitor their spending and saving in real-time. Unused cash from the envelope is the money they save, and seeing it accumulate will help them understand more about saving. As your child spends their allowance, it helps them keep track of what they have to spend and seeing the empty envelope helps them realize what’s left over is what’s saved.
- Discuss Difference Between Needs and Wants
Teaching kids the difference between a need and a want is important when it comes to constructing effective spending habits. Discuss wants versus needs and emphasize that, while wants can be nice to have, they are not necessities, and the money allocated towards them should be monitored carefully.
- Show Them How You Spend, Save and Invest
Children learn best when they see examples of their parents’ habits and mistakes. Show your child how you manage money as this serves as an example of how to and not how to. Let them be part of your financial decisions and talk to them about how and why you make certain financial decisions, careful to present money as a boring and rather dull notion, so as not to portray it as an interesting or appealing concept. Try using nicknames for various accounts, such as “the college fund” and the “vacation fund” when explaining different types of savings.
- Promote the Idea of Giving
Teaching kids about the importance of giving is a great way to encourage money-smart kids. Show them the importance of helping others and giving back to their community and teach them the practical aspects of giving, such as donating money to charities or sponsoring someone in need.
- Help Them Create Goals for Each Purchase
When your child wants to make a purchase, sit them down and encourage them to think of their goals for the item. Are they looking to only satisfy their immediate wants or will it serve them in the long run? Help them think of the pros and cons of making that purchase, and on a related note, talk to them about how the benefits of the purchase will outweigh the cost.
- Give Them Guidance When they Earn Money
Some kids may be lucky enough to get money through means other than an allowance, such as through a part-time job or tutoring. Give your child guidance on how to invest and use this money responsibly, to help them plan for the future.
- Talk About Investing
It is never too early for your child to think about investing. Explain to them in simple terms that the money they save can be put into investments, to increase their wealth over time. Talk to them about the risks of investing and emphasize that investments take time to pay off.
Raising money-smart kids requires a lot of time, effort and patience on the part of parents and guardians. Through careful guidance and teaching, children can learn valuable skills on managing, saving and using money responsibly, which will help them become successful adults when it comes to money. By following the tips mentioned above and setting the right examples, you can ensure that your children become financially independent, money-smart individuals.
