With everything there is to know about personal finance, managing your own money can be daunting. Imagine if you were the child of a finance pro!
Cash in hand
Kids as young as two can start getting familiar with how currency works. Starting them early could help them be financially responsible down the road. “Even though my daughter is young, she understands that money is exchanged for things. When we go to restaurants, we play with money, and she pretends to pay,” says Erin Ellis, financial educator at Philadelphia Federal Credit Union.
Show me how to save
Even at a young age, it’s our natural instinct to hoard our “things.” Why not harness that instinct and teach kids how to save money? “I hear from parents whose kids are older than mine that their kids will save their own money, much in the same way that children save toys, but will be hesitant to spend it—the ‘I, me, mine’ mindset,” Ellis says. “Saving is inherent to how children function when they’re young, so it’s important to tap into that so they continue the practice of saving into their teens and adulthood.”
Compound interest
How interest accumulates over time is a tricky yet essential idea to understand. “I have taught my children the concept of compound interest so they understand why starting to save at a young age is important,” JJ Ramberg, founder of coupon site Goodshop and author of The Startup Club says. “There are compound interest calculators online, that really help illustrate the point.”
Profit and loss
A business of any size requires some financial forethought. Ramberg’s kids are mini entrepreneurs, and have started a number of businesses, from lemonade stands to manicure spas. “We always do a little P&L (profit & loss) so that they understand the difference between revenue and profit. As soon as kids understand addition and subtraction, they can understand this,” she says.
Free is not always free
Something may seem like it won’t cost you anything, but most things are not truly free. “If my 10-year old son wants to get a new game app on his iPad and he says ‘It’s free, mom!’ I look at the app with him and explain that yes, it says it is free to download; but if you notice here, there is a note that says “in-app purchases,'” says Bobbi Rebell, financial journalist and author of How to Be a Financial Grownup. “I explain that once you are playing the game, they will tempt you to buy certain features.”
It’s OK to pay
We should get comfortable with paying for things that matter to us. Rebell says, “Equally important is teaching him that it is OK to pay for things that you value, and that the people who create value deserve to be paid. So if he can afford to pay for extra features in the program and chooses to do so, that is an important part of the U.S. capitalist economy. The creators of the game should get paid for their work if they deliver value.”
Reality check
Kids often have a hard time grasping how much things cost, but we can teach them by making it personal. “When my daughter asked me how much the trip to Walt Disney World and Universal Studios cost, I told her the amount. Then, so she would have a better concept of what the $1,200 really meant, I asked her to tell me how many weeks it would take her to pay for the trip herself, based on your $20 per week allowance,” says Kathleen A. Grace, CFP®, CIMA®, Managing Director, United Capital and author of Prince Not So Charming®, Cinderella’s Guide to Financial Independence. “She was shocked that it was more than a year!”
Take them to work
It’s equally important to demonstrate how money is earned so kids understand what makes everything they have, and everything they do, possible. “Engage your children in your career if possible (internships or part-time work), which can help build character by teaching responsibility and accountability, Grace says. “They can also experience the correlation between earning wages and the costs of running a household. Many children may not understand or appreciate that there are expenses associated with the water that comes out of the faucet, the channels on their television, and the Internet for the computer.” To give your kids a healthy dose of perspective, Grace also recommends exposing your kids to people of varying socio-economic levels and teaching them how to be charitable with their time by participating in a community outreach program.
Goal setting
Denise Paige Anderson, financial specialist with the National Financial Network, shares that when she was younger, she wished someone had taught her the importance of starting early to prepare for her financial independence. She makes this a priority with her own kids. “I tell my kids to set goal for themselves and to save their birthday money to reach them,” says Anderson. “The goals should be obtainable—like a new bike or an iPod. They experience the positive result and personal empowerment of savings.”
Connect electronic transactions to reality
Technology gives our kids access in ways we never thought possible. Transactions are easier then ever before, and that ease can get them—and you—into financial trouble. Anderson stresses that kids need to take responsibility in order to appreciate how electronic transactions work. “One day I opened my credit card statement to discover that my child had racked up $350 of game charges through iTunes the night before she left for camp,” she says. “Three weeks later, we had a discussion about the value of money and how electronic payments make it difficult to measure your spend. A click on the keyboard and boom…the money is gone. She used her allowance and extra jobs to pay it back. That took a few months. I think it made her appreciate how easily one can be fooled by the ease of transaction processing and the baiting of video games.”
