As a parent, teaching your children about finances and instilling financial responsibility is essential. It sets them up for success early in life by fostering responsible money habits. The best way to do this is by setting a good example with your own finances and explaining your reasoning behind decisions. In addition, there are various strategies that can be employed depending on what would resonate the most with your child. There is no single solution or best option as each child learns differently and at their own pace. A few of our favorite ways to teach children about finances include:
Starting early to help your child in the future:
- Deposit any financial gifts into a savings or investment account in their name to teach them the importance of saving (this includes birthday and other holiday gifts). When they are old enough to understand what a savings account is, you can start sharing statements with them or dividing gifts between their checking and savings accounts. If you decide to implement this strategy, you may want to maintain control over this account until they are old enough to embrace the importance of savings.
Teaching younger kids about money:
- Use a glass jar for chore earnings so you can watch it fill up together to achieve their goal, even if that goal is as simple as a trip to the toy store
- Help them understand that everything costs money by giving them cash to make purchases at a store and help them understand what they are and aren’t able to afford with the amount
- Instead of an allowance, pay per chore completed to help your child understand how money is earned
- Provide your child with a budget versus allowing impulse buys on your dime (there are various applications that can help with this as well)
Teaching older kids about money:
- Teach them how to spend responsibly through a joint checking account that you monitor together with a connected debit card. You can schedule check-ins or ask for account updates prior to outings where money will be spent. This can provide your child with a bit of independence while also helping you ensure they are spending wisely and not overdrafting their account.
- Once they have a job, help them put 20% of their earnings into their savings and investment accounts to start positive habits early. This also allows you to teach them about compound interest early on as they watch their money make money.
- When it comes to investments, consider working with your child to max out a Roth IRA account each year if their finances will allow. If it fits in your budget, you could even choose to match whatever amount they contribute to their investment account as an additional incentive. This can help teach them the benefit of an employer match while also helping their future financial security.
- Teach them about credit cards, and possibly help them build credit with a joint credit card that you ensure is paid off monthly. This is beneficial to do before they get bombarded with credit card offers after their 18th birthday.
In general, you must do whatever is best for your child and family. Whether you use the suggestions above, sign your child up for financial classes, or do research to find additional applications and opportunities to teach your child how to be financially responsible – the most important thing is that you are being proactive and doing something. You’ve got this!
Written by: Alexis Houlihan, CFP®, CSLP® | Financial Advisor
Written: July 18, 2024