As Benjamin Franklin once said, "An investment in knowledge always pays the best interest." When it comes to teaching children about money and personal financial responsibility, the earlier money lessons are learned, the better.
The benefits of teaching your children about money are both short- and long-term. They may develop strong saving habits, learn how to make smart purchases, begin to understand the true meaning of "investment," and perhaps even learn why they can't always have everything they want. By teaching the value of saving for the future, you can help them plan for financial security and avoid potential debt accumulation.
An ideal time to begin teaching your children about the basics of money is when they first begin to notice money itself. In a child's world, money simply comes from Mom and Dad's pockets. When Mom and Dad are tapped out, a machine magically spouts more dollars after merely pushing a few buttons. It's natural for children to assume that money is readily available whenever it's needed.
Introduce an Allowance
Even very young children can begin to understand the concept of earning money. Explain to your children that money is earned by working and that you can only spend what you earn. To help them understand what it's like to get paid on a schedule, begin paying your children an allowance. Help them set goals for how they spend and save their allowance, making sure that you stick to the payment schedule. Otherwise, the lesson may be lost.
Take Advantage of Real-Life Learning Opportunities
You hear it every time you walk by a toy store: "I want this. Buy me that!" This situation presents a great opportunity to teach another important lesson about personal finance: savings and interest. Explain that people often save money for items they want to buy, and encourage your children to save a portion of their allowance for their special goals. Use a piggy bank, shoebox or old peanut butter jar as their bank. As they save money, you might reward them with a small additional amount, just like a bank pays interest. At the end of each month, calculate how much they have saved and chip in a certain percentage as interest.
To further encourage the learning process, you might consider plotting a visual chart of their savings (include the goal) so they can literally see their savings grow. Remember to keep it as simple as possible and geared toward each child's level of understanding.
Open a Bank Account
Once your children have saved enough to accumulate $10 or $20, take them to the bank to open their first savings account. Most community banks will allow children to open first accounts with low minimum deposits. Some even have accounts specifically marketed toward kids to make the learning process fun. Make sure that your children receive a passbook so they can see the progress of their savings efforts, as well as the interest that accrues.
Teach the Benefits of Compounding
As your children get older and perhaps take on part-time jobs, their savings will likely amass at a quicker rate. Now is the time to review the lesson of compounding, which is the ability of earnings to build upon themselves. Explain how compounding can be more dramatic over time; the longer money is left alone, the greater the effect. This can lead to a discussion about investing and how certain types of investments can have a greater ability to compound than others.
Giving a gift of stocks of well-established or kid-oriented companies can be an ideal way to teach your children about investing. Most children would love to think of themselves as owners of Ben & Jerry's, Disney or Toys R Us. Some companies even have shareholder meetings directed toward children. Consider that stocks will fluctuate in value and may be worth more or less than their original purchase price when sold.
Remember, a Little Learning Can Pay Off
Teaching your children about responsible savings and spending may seem daunting at first, but you can help put your child on the right track in the future by developing smart habits now.