Understanding how money works is an essential life skill. Unfortunately, for a lot of people, these lessons come later than they should – and often as the result of something going terribly wrong.
Not enough people make financial education a priority for children, which results in young adults entering a surprisingly complex financial world without the tools necessary to survive and thrive. Even if your children are very young, remember that the sooner you start teaching them money and personal finance skills, the more adept they’ll be at applying those skills when the time comes.
Financial lessons – how to save money, how to make it grow and, most importantly, how to spend it wisely – must be age-appropriate to be meaningful and beneficial. Young children are not miniature adults. Lessons should be tailored for their age, rather than just made simpler.
Start as soon as they are able to count, and make money the topic of regular family discussions. Time these around dates (for example, a birthday or Christmas) when they are due to receive a cash gift so that you can talk about saving versus spending.
Help your children avoid spontaneous purchases by setting goals and prioritising what they spend their money on. This will prepare them for making good spending decisions in the future.
While a child will naturally ask for the latest games console, making them understand the difference between needs and wants will help them make sensible spending decisions from a very young age.
Help your children to set a goal and track their savings and their spending. Young or old, people rarely reach goals they haven’t set. Nearly every toy or other item children ask their parents to buy them can become the object of a goal-setting session.
Such goal-setting helps children learn to become responsible for themselves. A great way to visualise goals for children is to create a savings chart you can display somewhere prominent (for example, on the fridge).
Explain and demonstrate the concept of earning interest income on savings. Consider paying interest on money children save at home. Children can help calculate the interest and see how fast money accumulates through the power of compound interest.
Later on, they will also realise that the quickest way to a good credit rating is a history of regular, successful savings. You could even offer to match what your children save on their own.
Providing pocket money in lower denominations makes it easier to allocate a proportion of income to different goals. Labelled jars work to separate money – one for saving, one for spending, and one for donating.
Any time they make money by doing chores or receiving birthday gifts, encourage your child to divide the cash equally among their jars.
It’s not a huge act, but it does show that it’s okay to spend some money, as long as you’re saving as well. Once they’re older, their bank and investment accounts can mirror the split. Keeping good records of money saved, invested or spent is another important skill young people should learn.