How to Raise Money Smart Kids
Money smart kids grow up to be money smart adults. I believe that one of the greatest responsibilities as a parent is making sure our kids will make smart choices with their money. No matter how successful they are in school, if they don’t have a good understanding of handling money then they are likely to make bad financial decisions later on in life.
The Concept of Limited Resources
One of the most important things for kids to understand is that we operate in a world of limited resources. I’m referring to the concept of scarcity — how we balance our confined resources with our endless wants. Judging by the number of items they have on their wishlist, needless to say, my kids were definitely not born with an awareness of this concept!
Kids will always want to buy more stuff; either it is the next hot toy or an outfit they saw their friends wear. It is the job of parents to teach them that it takes money to buy anything and everything. Money doesn’t grow on trees!
I try to be as transparent as possible when it comes to our household budget. I tell them how much we pay for items from food to clothing to utility bills. Younger children may not fully understand exactly how much is “too much”, but showing them how much things are gives them a general idea for future comparisons.
We need to explain the concept of trade-offs: if you buy this, you will not have enough money for that. We need to teach kids to make choices in the framework of having a limited amount of money so they will make a habit of making smart choices and setting priorities.
Don’t Tie Allowance to Chores
Now, I’ve read plenty of child rearing books that encourage giving money to kids for doing household chores. I have many friends who do this. The idea is that you’ll only get money if you work for it.
At a certain age, I think it’s perfectly fine to give them some sort of allowance. This will teach them how to handle money, where to allocate their limited resources. Perhaps even teach them about saving money for something they really want.
Giving allowance is fine, but I don’t believe it should be tied to household chores. I believe that kids should learn that helping out around the house and doing chores is their responsibility as a part of the family.
The idea I want to instill in my children is that as part of the family, it is their responsibility to contribute. We work as a team to make this family work, so we all must give our time and energy. Instead of focusing on how much money they can get for doing something, try to create a harmonious family environment that everyone will appreciate.
Learn by Consequences
As long as the children are not in actual physical danger, I am a firm believer of learning by consequences. It is the natural tendency of parents to protect our kids from anything unpleasant, whether it is physical, psychological or financial. However, letting them make their own mistake can make a bigger impact than the constant nagging.
So when your child wants to bring the new toy to school to show friends, allow it! They need to understand that if it gets lost or broken they will not get another one. You can tell them a million times the consequences of bringing a beloved toy to school, but it will make no impact.
Avoid bailing children out by fixing the problem for them. If they think that money can always be used to solve a problem, then they will keep making the same mistakes. They will not learn to value money and won’t appreciate how hard you have to work for it.
In my family, if the kids see something they want then they can purchase it with their own allowance. I will always ask them to think hard about what they want and if they think it will be worth it. You’d be surprised at how many times they decide not to purchase the item when they have to use their own money!
Lead by Example
The relationship that our kids will have with money in the future is largely determined by how they see us — as adults — deal with our money today.
The goal of most parents is to teach children to think and act a certain way so they can better survive in society. Teaching them how to deal with money should be part of it. We want them to grow up to be responsible with money and understand smart budgeting. These lessons should be taught young and be reinforced so it will become a habit and second nature.
I always show my kids the coupons or promotional codes I am using when I buy an item or eat at restaurant. By explaining how I received the coupon and how much discount we got, I want to expose them to different ways of saving money and show them how to use money in a way that is logical and smart.
Raise Money Smart Kids
Kids are like sponges, they absorb everything within reach including your outlook and attitude towards money. Developing a healthy relationship with money with smart budgeting techniques will demonstrate to your kids that a penny saved is really a penny earned.
Like with anything, communication is important. Talk to your children about financial choices we have to make as adults. Of course, vary the complexity of the situation depending on the age of your kids. Remember, it’s never too early to start raising money smart kids!