Teaching financial literacy and money management at a young age is a crucial aspect of a child’s upbringing. Financial literacy for children is an important life skill that will prepare them for adulthood.
Teaching children about money management at an early age is essential for their future success and financial well-being. By starting early, children can develop healthy financial habits and gain the skills they need to make informed money decisions when they become adults.
Teaching children about money management early can help them avoid financial pitfalls later in life. Many adults struggle with debt, poor credit, and other financial issues that could have been avoided with better financial education. By teaching children about budgeting, saving, and investing, parents can help them avoid these common financial problems.
What is Money Management?
Money management is the process of tracking expenses, investing, budgeting, banking, and assessing tax liabilities; it is also called investment management. Money management is a strategic technique to deliver the highest interest-output value for any amount spent on making money.
It is a natural human tendency to spend money to fulfill cravings regardless of whether they can be justifiably included in a budget. The idea of money management techniques was developed to reduce the amount that individuals, firms, and institutions spend on items that do not add any significant value to their standard of living, long-term portfolios, and assets.
With money management, children are exposed to and prepared for what to expect when it comes to the four principles of finance: income, savings, spending, and investment. Children, who are exposed to these principles and also follow them at the adult stage, will help them maintain their finances at a healthy level.
Why Should Children Be Taught Money Management at an Early Age?
Here’s why money management for children is essential:
- Children must learn that money needs to be earned and doesn’t come easy. A solid understanding of money will help them make better financial decisions later in life.
- Teaching children about saving money and budgeting will help them avoid debt and financial problems. For example, children who learn about money management early on are more likely to be financially successful in the future. They will be able to set financial goals and work towards them. They will also be able to make better financial decisions, which will help them to avoid debt and overspending.
- A benefit of teaching children about money management early on is that it can help prepare them for the workforce. Employers are increasingly looking for candidates with money management skills, such as the ability to budget and manage finances. By teaching children these skills early on, parents can help give them a competitive edge in the job market.
- Additionally, money management for children can help them develop a healthy relationship with money. Children who understand the value of money and how to manage it are less likely to fall victim to materialistic values or get caught up in the pressure to keep up with their peers. They are more likely to make thoughtful, intentional decisions about their spending and investing habits.
Money Management Concepts for Children
These are basic money management concepts children should be exposed to:
What Money Looks Like
Knowing what money looks like is the basis of money management skills for young children because it helps them understand that money is a real thing with real value. This is especially important if you often use digital money, which young children can’t see.
Where Money comes from
Your child needs to know that the money your family uses to buy things comes from somewhere – for example, from your work, the government, and so on.
What Money is for – Needs and Wants
Money is for buying the things we need and want. Needs are things your family must have to survive. Wants are things that are nice to have but your family can live without.
When children understand the difference between needs and wants, they can start learning about basic budgeting and saving. This is about spending your money on the things you need first. If you have any money left after buying what you need, you can spend it on things you want or you can save it.
How to Use Money Wisely – Budgeting and Saving
Budgeting is deciding how much money to: spend on your needs, spend on your wants, and put aside for things like savings and emergencies.
How to Get Value for Money
Getting value for money depends on first understanding the value of things. For children, this starts with understanding:
- Why do different things cost different amounts – for example, why does a fridge cost more than a toaster?
- Why the same sorts of things can cost different amounts – For example, why does one brand of muesli bars cost more than another?
- Why you might choose an expensive item over a cheap one – for example, why it might be better to buy a wooden rather than a plastic toy.
- Why you might buy things on sale.
Effective Ways to Teach Children Money Management
With money management, children can learn the importance of financial education and living within their means, which is one of the basic tenets of saving. Below are effective ways to teach children money management:
1. Discuss Wants vs. Needs
The first step in teaching children the value of saving is to help them distinguish between wants and needs. Explain that needs include the basics, such as food, shelter, basic clothing, healthcare, and education. Wants are all the extras—from movie tickets and candy to designer sneakers, a bicycle, or the latest smartphone.
You can even quiz them on items in your home to drive home the concept. For example, point out items in their bedroom or the kitchen and ask them whether the object is a need or a want. This allows you to explain the idea that you have to prioritize what you spend money on, leaving some money for future necessities.
2. Let them Earn their own Money
More than three-quarters of parents said they paid their children an allowance in 2022, according to a survey by T. Rowe Price, with kids earning $19.39 per week on average. If you want your children to become savers, allowing them to earn and save money provides them with the opportunity to learn how to use it. When you offer allowances in exchange for chores, they’re also learning the value of their hard work.
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3. Set Savings Goals
To a kid, being told to save, without explaining why – may seem pointless. Helping children define a savings goal can be a better way to get them motivated.
If they know what it is they want to save for, help them break down their goals into manageable bites. If they want to buy a $50 video game, for example, and they get a $10 allowance each week, help them figure out how long it will take to reach that goal, based on their savings rate.
4. Provide a Place to Save
When your children have a savings goal in mind, they’ll need a place to stash their cash. For younger kids, this may be a piggy bank, but if they’re a little older, you may want to set up their own children’s savings account at a bank or even get a kid-friendly debit card.
5. Have them Track Spending
Part of being a better saver means knowing where your money is going. Tracking expenditures is a little easier with a bank or debt card app, but you can also do it the old-fashioned way.
If your children get an allowance, having them write down their purchases each day and add them up at the end of the week can be an eye-opening experience. This will help them learn how to retire rich and fulfilled. Encourage them to think about how they’re spending and how much faster they could reach their savings goal if they were to change their spending patterns.
6. Give Kids some “Pocket Money”
Pocket money can help children to understand the value of money. You can choose to pay them for certain tasks, for example:
- Washing the car
- Taking the rubbish out
- Cooking dinner or making school lunches
- Hanging out and bringing in the washing
- Packing and unpacking the dishwasher
- Walking the dog
Make sure you withhold or reduce their pocket money if the tasks are not done or not done properly. This helps to teach kids that they only get paid when work has been done to a certain standard.
7. Set Money Management Goals with Your Children
Help your kids avoid impulsive purchases by teaching them to set goals and prioritize what they spend their money on. A healthy financial plan can help your child prepare for the future.
When your child wants to spend money on an impulse purchase, remind them about the goal they are saving for. Work out how much longer they’ll have to wait to reach their goal if they decide to spend today.
8. Leave Room for Mistakes
Part of putting kids in control of their own money is letting them learn from their errors. It’s tempting to step in and steer kids away from a potentially costly mistake, but it may be better to use that mistake as a teachable moment. That way, they’ll know in the future what not to do with their cash.
9. Act as their Creditor
One of the basic tenets of saving is to not live beyond your means. If your child has something they want to buy and feels impatient about saving for it, becoming your kid’s creditor can help to teach a valuable lesson about saving.
Say your child wants to purchase something that costs $100. You could “lend” the money and require payment from the allowance that you provide, with interest. The lesson you want to teach is that saving may mean delaying gratification longer, but the item you want to buy will end up costing less if you wait.
10. Talk about Money Management to Your Children
In a 2022 T. Rowe Price survey, 37% of parents said they don’t like to talk with their children about money, with many expressing embarrassment about bringing up the topic. However, if you want kids to learn about saving, you have to nurture an ongoing discussion. Whether you schedule a regular weekly check-in to talk about money or make money chats part of your daily round, the key is to keep the conversation going.
11. Set a Good Example
The T. Rowe Price survey found that 51% of parents realized that they do not have enough of an emergency fund. If you want your children to become savers, being one yourself can help.
Getting your emergency fund in shape, or simply creating open savings contributions are all steps that you can take to encourage saving as a family activity. You could also decide to save for something together, such as a big-screen TV, a family vacation, or a pool.
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Conclusion
Starting early is important when it comes to teaching children about money management. Even young children can start learning about the value of money and basic concepts such as saving and spending.
Parents play a critical role in helping their children develop healthy financial habits and learn about money management. One of the most important things parents can do is lead by example. Children learn by observing their parents’ behaviors and attitudes towards money. By modeling good financial habits, such as budgeting, saving, and investing, parents can set a positive example for their children to follow.
