When it comes to teaching children financial responsibility, six simple rules can help to ensure success:
- The sooner the better when teaching children about money.
- Instill an instinctive conservatism in regards to spending by teaching your children how money works.
- Plant seeds early to bear fruit later.
- Use allowance as a teaching tool.
- Give bigger responsibilities to teenagers and college students.
- Educate about investing at an early age.
Using Allowance as a Teaching Tool
Whether you believe in giving your kids an allowance or not, experts agree that allowance is not effective if the child isn’t old enough to count, and that a successful allowance should be structured from the beginning.
Before any type of payment is given, children should understand what they are allowed to spend their money on and how much should be saved. It’s not fair to expect a younger child to pay for lunch money, but older kids may benefit from understanding how quickly money can be spent on the necessities.
Some parents feel frustrated that giving their children an allowance opens up the floor for them to negotiate for more money after a certain period of time. According to some experts, using allowance as a teaching tool makes it appropriate for parents to negotiate when a “raise” is appropriate and when children should be evaluated on their work.
Parents often feel perplexed when deciding how much to pay their children and these amounts are typically decided by the family values and situation.
Set a Budget
If you’re interested in learning more about money management, you can expect to hear about budgets for the rest of your life. Get your children used to the concept while they are young so they can be successful at it in the future. The SpendSmart ebook covers tips on the best ways to teach your teens about financial responsibility. You can get a one year subscription to the series by clicking here.
Before you start the allowance, set a budget with your child, and come up with consequences when your child doesn’t stay within their budget. Communication like this ensures that your child is aware of the consequences before the choice is made, and takes the burden off your shoulders.
Use play money to introduce the concept of budgeting and saving to younger children. Set goals with your children and remind them of their goals regularly in order to keep them on the path to financial responsibility. Younger children may have a harder time understanding the concept of long-term goals, but once a child hits 9 or 10, they should be able to save for big-ticket items with their allowance.
Start Early with College Students
College brings a whole new load of worries and concerns, and finances are a big part of this. You can prepare your college student by starting a checking account with them as early as 11th grade. Keep it simple in the beginning and avoid the extras, but bring in new concepts over time. Once they’ve demonstrated positive decision making skills, introduce an overdraft or credit card.
While it’s important to set guidelines with your children, it’s also important that they be a part of every step in the process. Allow them to help you set the rules and the consequences, and don’t bail them out when mistakes are made. Be patient with them as they learn the ropes and leave some wiggle room in the budget. Once your child has demonstrated a grasp of the basics of money management, you can bring in the more complicated concepts of investing and interest rates.