Teaching Kids Money | Business
There are a few people who are naturally good at managing money. The rest of us, including me, need to learn good money management habits.
The first class I taught at The Lutheran University of Texas was a personal finance class. Even though it was very practical, I only received students when I was 18 or 19 years old. At this point, many bad habits have already been established and opportunities missed. Instead, researchers at the University of Cambridge are encouraging families to teach children as young as 3 years old about money and personal finance. Certainly in kindergarten you have to have these conversations with young people.
For many families, this can be a daunting task. However, the more you stay focused on common sense, the better off you’ll be.
Children should understand that hard work pays off. The sooner a strong work ethic can be instilled, the more likely a child is to be self-sufficient in life. Instead of giving children an unconditional “allowance”, make sure that the tasks are correctly defined with the corresponding rewards. If they are not performing, they should not be paid.
Encourage them to embrace entrepreneurship. Help the kids understand if they want to move forward, they should create a budding business empire. It could be mowing lawns, washing cars, keeping animals, selling lemonade, or anything else you could dream of. This process teaches responsibility, time management, communication skills, and money management.
Help the children understand that, whether they get money from a job or a gift, a part needs to be saved and invested. Spending some of it is good. However, some of the money has to have a long term goal.
Match the savings. When kids earn money, encourage them to save. Forward-thinking families may be willing to âmatchâ the funds that a child sets aside for investment. This helps them get an immediate return on their investment and reinforces a long-term vision.
When discussing investing and the future, help the children understand âcompound interestâ. In doing so, I write the math down on a piece of paper and explain it over several periods. This allows me to show them the mathematical progression of the exponential growth of compound interest. In the process, children should learn the benefits of delayed gratification.
Teaching children to harness their earning power helps them understand the efforts and consequences when they want to spend money. When discussing this with the children, I like to discuss the opportunity cost. It was the best economics lesson I learned in college. Children should understand that if they are spending money on a toy, they will say yes, âThis is the best way to spend my limited money. This forces them to think about their spending and the future. It also helps kids understand what things cost.
Sleep on it. Ask the children to identify things they might buy at some point in the future. By this date, if I see something that I really want, at that point, I’m going to write it down and put it aside. I give myself time to think about if this is how I really want to spend my money. The bigger the article, the longer I force myself to wait. This reduces impulse purchases and subsequent regrets.
Sleeping on it also boosts delayed gratification. If someone wants to be a good fund manager, they have to accept deferred gratification. Yes, you can spend a dollar today. Or, you can invest it and have a lot more to work on in the future.
Have fun. While it may be dated by today’s standards, sit back and teach your kids to play Monopoly and The Game Of Life board games. Both are basic, yet fun and get the important points across. You can also sit back and watch the animated series produced by Warren Buffett called “The Secret Millionaires Club”. Each episode is full of money and life lessons.
The sooner you can start embracing financial talks with your children, the better prepared you will be for them to be successful on their terms. No careful management of money is rocket science. However, it requires constant discipline, a work ethic, and a long period of time.
Dave Sather is a Certified Financial Planner from Victoria and Owner of Sather Financial Group. His column, Money Matters, is published every two weeks.