Teaching Financial Responsibility to Children
Whether you already have children or expecting your first child, we have some financial tips to help you prepare for their future. Start by creating a solid plan. Setting a good example will allow children to model good financial behavior. They will become more responsible with money and learn the importance of saving for the things they want to purchase. They will understand the benefits of planning, the concept of compound interest, and how to plan and work within a budget. It’s never too early to teach children about money!
Here are 4 financial tips that will help your child develop financial responsibility:
- Benefits of a savings account:
Opening a savings account for your child is a great way to teach kids positive money habits even at an early age. Let kids know their money will be secure and they can collect interest. The habit of saving money will be more beneficial when kids are older and start working. Their money is accessible at any time although some banks have a limit on monthly transactions. Do your research to understand the benefits and downsides of opening a savings account for your child.
Give younger kids the hands-on experience of going into a traditional bank or credit union to experience the process of opening a savings account. Many adults prefer taking care of their banking needs person-to-person. Traditional banks tend to offer customer support through phone, email, and chats, and online banks offer customer support mainly via email and online chats.
Talk to your teens and young adults to discuss the pros and cons of online banking. Online banking fees may be less or they may offer better interest for their products and services. Do your research because fees vary from bank to bank whether they are in-person or online. Banking online saves time and lets you avoid standing in line or waiting in the drive-thru lane. Most banks have sophisticated websites that are safe for opening an account and tracking your money.
Either way, you will be making a good choice, whether it’s in-person or online banking.
2. Teaching kids to plan ahead:
Planning will keep children focused on setting goals. As they get older, the plan will be a good source of motivation, and commitment, and provide a guide for decision-making. Teach them to save money before purchasing an item to help them realize if they can or cannot afford it. It’s important to know where you stand financially and planning is shown to improve financial outcomes.
Learning to anticipate or think about the future will help prepare you for upcoming events. This skill will also help you become proactive instead of reactive. If you can anticipate possible problems you can prepare for them, possibly avoid them, or be better prepared to handle them.
3. Explain and show kids how interest works
Explain to your child how their money can grow with compound interest.
Albert Einstein is famously known to have said, “Compound interest is the eighth wonder of the world.” In finance, that statement is not an exaggeration!
For young kids you can play a fun game as a simple example of compound interest:
- Pretend you are a bank for one week
- Your child gives you a dollar to hold
- You give them a receipt for the dollar you are holding
- Tell them to keep the receipt in a safe place
- You will give them a nickel every day that you hold their dollar
- At the end of the week, give your child the dollar back plus the nickels to show them how interest works.
You can also discuss the example above as if they are the borrower:
- Pretend they borrow a dollar from the bank
- They will have to pay it back with interest
- They give the bank a nickel every day until their dollar is paid
- If they take a long time to pay it back, their debt will keep growing until they pay the dollar plus interest!
As children become teenagers, you can guide them on interest-related topics such as credit cards, student loans, or their first car loan.
4. Budgeting:
Start teaching financial concepts early. You can start teaching your child about money at a young age by giving them an allowance and helping them understand the value of saving and budgeting. Create a budget with your teenager and let them know it’s not that difficult. This activity will help them get a better understanding of their financial situation. Kids can write down how much money they have saved and how much it will cost to purchase an item. Have a conversation about saving and different ways to earn more money. Talking about money can give kids a better understanding of money matters and help build confidence as they grow. Creating a tracker can also be helpful when they are ready to make more complicated decisions.
Summary:
Encourage younger children to complete chores around the house. For older teens, point out the benefits of perhaps a part-time job. Your child can earn their own money and understand the relationship and value of hard work.
Help set financial goals and encourage your child to work towards achieving them. Goals could be saving for a specific purchase or learning to live within a budget.
Discuss financial decision-making with your child to help them understand the consequences of financial decisions. Encourage kids to think carefully about how they spend their money. You can use some of the many educational resources available, such as books, games, and websites, to help teach children about financial responsibility in a fun and engaging way.
By teaching your child about financial responsibility and setting a good example, you can help them develop the skills needed to be financially secure.
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