Financial literacy for kids – how to teach kids about money

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Tess, from Money Done Right has written this guest post about teaching your kids about money, somethings that’s important to most of us!

No one really taught us about money and lessons were learned the hard way over the years, so if we can save the kids a little stress, we’d like to!

Over to Tess…

Money management for kids

We often think of personal finance as something that’s entirely under our control, but the reality is that our attitudes toward money are shaped by a wide range of environmental factors. In particular, the way our parents talk to us about money has a significant impact on the way we’ll view money for the rest of our lives.

This article will cover some of the best strategies for having productive conversations about money with your children. Simply talking more openly will help your child learn more about money in a supportive environment, leading to better financial habits later on.

How to be a good financial role model for your kids

You can have a positive effect on your child’s financial outlook by talking about money in a positive way, but nothing can replace the benefits of demonstrating good habits in your own life. Kids are much quicker to pick up on what we do than what we say, so your advice probably won’t get through if they see you contradicting it.

This tip works even more effectively if you tie the advice you give to actions they can see you perform. If you’re talking about saving, for example, show them your own savings account and let them know how you got there. Conversations about finance should go both ways—they shouldn’t feel like you’re lecturing them about money.

Be Honest

With that in mind, it’s important to have an honest understanding of your own financial habits before attempting to pass them on to your children. Don’t pretend that you have a perfect financial past or that you no longer struggle with money—you should always be as honest as possible when discussing money with your kids.

Over time, this attitude will help your children be more open with you in return. Children who don’t feel comfortable with the way their parents talk about money are less likely to confide in them as teenagers and young adults. Your child should understand that you’re both working toward the same goals.

Let Them Lead

Every kid interacts with money at a different age, and some kids are naturally more curious about finance than others. Rather than forcing the conversation to happen at a certain time, let your child know that you’re available if they have questions and start by responding to their curiosity.

Most kids have very few conversations with their parents about money, so simply taking the time to talk will go a long way. Depending on their knowledge of finances, you could even learn new things together—even adults often overestimate their own understanding of different financial topics.

Focus on the Big Picture

The truth is that much in personal finance revolves around the little things, and attention to detail is one of the most important skills to develop. On the other hand, these specifics aren’t usually as relevant for children who are just beginning to learn more about money.

Instead of focusing on exactly how much you earn and spend on different things, for example, emphasize the importance of avoiding bad decisions like going into debt for impulse purchases. Kids are more likely to care about the way you approach money than the actual numbers.

Don’t Pay Them for Chores

Many parents assume that offering allowance in exchange for chores is the best way to introduce kids to the concept of working, but a surprising number of experts recommend a different approach. If you decide to pay your children an allowance, it’s better to manage this money separately rather than tying it to household jobs.

The issue with connecting allowance to work is that it makes chores seem like an optional task rather than an important contribution to the family. Combining them into wage labor can make things complicated, especially if your child decides that they don’t want the money enough to do the work.

Instead, they should understand that their pitching in is about your family rather than monetary gain. Similarly, their allowance should be viewed as a tool for developing financial habits instead of as compensation for work.

Of course, this isn’t to say that there’s anything wrong with paying your children for certain jobs. If you need help with a simple task for work, for example, offer them a small bonus in exchange for completing the task after school. The relevant thing here is that the work is voluntary and there are no consequences for saying no—required jobs should never be tied to money.

Talk About Retirement

The idea of your child retiring probably sounds impossible, but retirement is a critical topic to start thinking about early in life. Many people assume they can wait before saving for retirement until they crunch the numbers at 40 or 50 and realize that they’re already behind.

Tax-advantaged retirement accounts like 401(k)s and IRAs have strict contribution limits each year, so you can’t simply make up for the years you missed by contributing twice as much later. The earlier your child saves for retirement, the easier it will be for them to retire comfortably at or before 65.

You’ve (hopefully) started working toward your own retirement, so you can use this as an example to illustrate the importance of regular contributions. If not, think of it as a learning opportunity for both of you—you’ll be able to get on the right track and teach your child a valuable financial lesson.

In addition to discussing retirement, you can also help them reach that goal in a more tangible way by setting up a Roth IRA for some of their allowance. There’s no minimum age to create or contribute to a Roth IRA, and they can technically contribute their entire earned income. That investment will continue to grow throughout their childhood, so even small contributions will make a big difference.

Parents are often unsure of how to approach conversations about money, but there’s nothing wrong with starting slow based on your child’s age and interests. These tips will help your child develop a positive relationship with money and build good habits for their financial future.

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