As any parent knows, kids are not born knowing how money works. In fact, their understanding of it often starts with “I want that!” followed by a parent either buying the item for them or trying to explain why they can’t have it.
But how do you teach a child the value of money and how to handle it responsibly? Kids typically learn best through observation and imitation, so when you make good financial decisions, your children will see and (hopefully) emulate your actions. But on top of being a good example for your kids, you can begin talking to them about fiscal responsibility at almost any age. But where do you start?
Here are five simple tips we’ve organized as “lessons” you can teach your kids to help them begin to form good financial habits.
Lesson #1: Money has value.
This is one of the first financial lessons to teach a child. Whether you have millions of them or only a few, one dollar is one dollar – it has the same purchasing potential no matter who is holding it. Once a child learns that money has value, you can begin to explain how they can use it to acquire things they need and want.
Lesson #2: There’s a difference between "wants" and "needs."
Help your child understand that not everything he or she "wants" is really a “need.” For example, you can explain that food is a "need," but candy is more of a “want.” Be sure to emphasize this when your children are young, otherwise the line between wants and needs can become blurred as they get older. Explain that acquiring "wants" is fun every once in a while, but only after needs are met and there is money available for the non-essential things.
Lesson #3: Patience is important when it comes to money.
Teach your kids while it may be tempting to purchase a "want" right now, it’s not always the best move. For example, is buying a cell phone with the latest technology the first day it becomes available a fiscally smart move? Probably not, because technology usually costs more when it’s new. If you’re willing to wait six months or a year before purchasing that new phone, you will save money while still getting the same technology.
Lesson #4: Provide an allowance.
You’ve already taught your child Lesson 1, “money has value.” To stay consistent with that message, require some effort on their part so they understand they have to earn the allowance. Using the allowance system can be a big help in teaching your child not only the value of money, but also the concept of working to earn it.
Lesson #5: Allow them to make their own decisions.
If your child has an allowance and asks if they can have something, tell them the decision is up to them if they’re spending their own money to buy it. While it can be difficult to take a step back and watch your children implement what you’ve taught them, it’s also a great lesson for helping a child understand how to make purchase decisions.