April is financial literacy month, and while many see this as an opportunity to focus on adults, the secret to long-term success lies in teaching children. No one is in a better position to accomplish this task than the parents.
“There is absolutely no question in my mind that parents can make their kids better savers by teaching them about saving from an early age,” says Matt Schulz, Chief Credit Analyst for LendingTree
TREE
in Austin, Texas.
Smart parents like you start their kids early when it comes to sports, musical instruments and academic learning. Young minds are malleable at these ages. They’re more likely to pick up and retain fundamental concepts. And once they’ve got the basics down, they can more quickly move to the advanced topics.
This gives them an edge in whatever field you allow them to concentrate on.
Why not do the same when it comes to money?
Here are ten tips offered by financial professionals to parents seeking to give their kids a leg up on the competition when it comes to financial matters.
1. Give Them a Goal
Before kids can even read, they understand pictures. This means they’re more likely to be able to draw something they want before they can spell it. Use this visualization technique to help them establish small attainable goals. This is a great habit to develop early as it has applications well beyond money and will help both at school and at work.
“Encourage children to make goals,” says Nicole Watson, SVP/Territory Delivery Director at UMB Bank in St. Louis. “One way to teach young children financial responsibility, particularly saving, is by instilling a goal-setting habit. Make a savings goal chart and use stickers or drawings to visually demonstrate the amount of money saved each week. If your child wants to save up for a specific item, consider adding a picture representing what he or she wants to purchase with the saved funds as a motivation.”
2. Delay Gratification
The hidden secret to obtaining any goal but especially financial goals is patience. It takes time to build what is necessary to achieve what you seek. It’s actually easier to demonstrate this with modest money-based goals. That’s because there’s not a long wait between the anticipation and attaining that which you seek. This is important because too often kids “want it now.” So start small as you build the habit.
“Show the value of delayed gratification,” says Tremaine Wills, Financial Planner at Mind Over Money in Newport News, Virginia. “Instead of spending one dollar on candy today, save the dollar and keep saving until the child has saved enough to buy a larger desired thing like a new bike or game system. This is effective because it teaches discipline to put money to the side for a later much more rewarding benefit.”
3. Teach Them to Spend
In the course of setting goals and teaching patience, what you’re really doing is teaching your child how to spend. Still, don’t make this a theoretical exercise. Place your child in the position to actually make the purchase. They’ll learn (and remember) more from real-life experience than from any simulated role-playing.
“Make them pay,” says Josh Bennett, Founder of Vincere Wealth Management in San Francisco. “You’ll often have expenses for your child (hair-cuts, dinners, sports, textbooks…etc). Instead of giving them an allowance and paying for their needs out of your pocket, give them the money to pay for their own needs. For example, give them $500 per month, but then don’t pay for anything else for them. Make them pay their own bills. Make them choose between needs and wants. This will help teach them the value of a dollar.”
4. Tie Activity to Earnings
Now you’re ready to broaden the activity to include generating income. Think of the first three tips as basic training. Here’s your child’s first opportunity to take things to the next level. And the faster your child can reach this level, the faster your child can begin to master money in ways that can produce solid long-term rewards. As before, however, you want to start small.
“To teach children to save, create a set list of chores they can do that are age-appropriate,” says Jennifer Garcia, Managing Director for the Garcia Private Wealth Group of Wells Fargo Advisors in Encino, California. “Determine an amount that they receive for each type of chore and have the amounts vary based on the task. Then your child can start making decisions themselves on what chores they want to do. Make a chart to show them how much they have saved over a set period of time so they can see their progress. This exercise motivates your children to learn how to make choices and see the benefits of their ‘labor’.”
5. Be a Player Not a Spectator When It Comes to Saving
Once an honest days’ work begins to reap a steady income, your child is ready for the next stage: actual saving. You can’t save until you’ve learned to spend, and your child passed that test a few tips back. But you can’t truly save until you’ve found a way to get paid for doing work. Once you start bringing home the bacon, the door to saving opens.
And this means it’s time to “open a savings account,” says Watson. “Having their own independent account may encourage kids to save more money, and it will make them feel more responsible. Select a local bank and open an account, whether it’s a standard savings account or an account built specifically for parents and children. Consider asking the banker to discuss why saving is important so your child hears it from someone other than you. A monthly trip to the bank or ATM where the child personally deposits their new savings and receives a balance slip is positive reinforcement that they are growing their account. Additionally, this repetition will help solidify the importance of stashing away money.”
6. Expose Them to the Magic of Compounding
OK, this tip is really just for advanced classes. Nonetheless, it represents a tantalizingly delightful piece of the financial knowledge pie that’s simply too tasty to put off much longer. As adults, we understand the power of compounding. Kids might not appreciate it immediately. Still, it’s a seed worth planting.
“I would encourage parents to inspire their children to save by showing them a compound interest table of how dramatically money can increase if you continue to save it over a long period of time,” says George Kinder, President and Founder, Kinder Institute of Life Planning, Littleton, Massachusetts. “I’ve done this with my two 17-year-old daughters.”
7. Offer to Match Their Contribution
To really show actual compounding requires years and years of waiting. That’s probably too long for most kids. There’s a quick and dirty shortcut that does a good job of getting the idea across while at the same time encouraging your child to save. Think of it as the parental equivalent of the 401(k) plan.
“It can often be difficult to see the reward of saving during the early stages,” says Chanel Dorée, Wealth Advisor in RMB Capital’s Lake Forest, Illinois office. “Today, the $100 your child earned from walking the neighbor’s dog all summer will earn maybe $0.50 over the course of a year in their local savings account. However, if as a parent you are able to match what your child is saving, it is a much more impactful and rewarding training tool. This exercise opens the door for conversations about longer term savings, the impact of compound interest and one day, an employer match in a 401(k).”
8. Start Building a Great Credit Score
Here’s another advanced tip that moves your child up the financial literacy ladder faster than most. Be careful with this one, though, as it is ripe for abuse. On the other hand, when would you rather have your children make a “major” credit mistake: when they’re still living under your roof and “major” isn’t that big, or, when they’re on their own and “major” has a lot more digits in it?
“Get them a store credit card,” says Bennett. “I’ve worked with hundreds of teens from high school through college-age and most don’t have a credit score. Establishing credit can help them get low interest rates and even employment. If they have to refinance student loans or buy a house after college, then starting early on credit can save them hundreds of thousands on interest payments. In-store credit cards are often easier for teens to get and harder to mismanage as they learn proper credit card management skills.”
9. Have Them See Their Progress
Remember how visualization helped young children “see” their goals more clearly. Spoiler alert: Things don’t change as you get older. Consider how long it takes you to watch a movie versus how long it would take you to read the book the movie was based on. Pictures, graphs and charts all work wonders in communicating quickly and precisely.
Make sure your kids know where to find them, what to make and how to interpret them when it comes to their own finances. Start doing this at a young age and don’t stop, even when your kids are adults. There are a lot of creative ways to do this.
“Make the saving process visual,” says Aaron Shapiro, Founder and CEO of Carver Edison in New York City. “Putting money in a clear jar that builds over time is a great example of this. People often forget that pennies turn into dollars and dollars into hundreds of dollars. By saving and fighting the urge to always spend money as you go, the jar will serve as a reminder of how quickly money can grow.”
10. Be the Best Example You Can Be
Finally, the apple doesn’t fall far from the tree. When the child sees how organized the parent is when it comes to operating the family budget, the message is clear and memorable.
“The best thing you can do is to be a good role model when it comes to saving,” says Schulz. “You may not think they are, but your kids are watching what you do and listening to what you say. If you spend like crazy and never give any thought to saving, your kids will see that and assume that it is the right way to handle money. However, if you make a point to save what you can and talk about it with your kids, that can have a huge impact. I’m not saying you should give your kids all the deepest details of your finances, but just letting them know that you’re saving because it is an important thing for your family can be enough.”
The best part of practicing these ten tips is that, not only will they give your kids money smarts, but you’ll sleep better at night knowing your kids are ready to leave your financial nest.