Teaching kids healthy habits goes beyond eating well and getting enough exercise. It's important to teach them healthy money habits to. Financial education is few and far between in our schools, so children learn their money habits from their parents. Studies show that they way adults approach money and spending habits has a direct link to how they were raised around money.
In a world where we are bombarded with instant gratification, it's important to teach children the rewards of delayed gratification and saving up for something special.
Here are some simple steps you can take to make sure you set you children up for financial success.
1. Model Good Financial Habits
Kids learn what they live. Parents are their children's most influential teachers. Be mindful of your spending around your children. Are you buying the latest gadgets, do you eat out a lot as a family? If so, your children are likely to develop an “I want it, I can have it” financial attitude, which could lead to some painful financial mistakes as they get older.
Show your children how to defer gratification by having them see you saving up for big purchases or making an effort to cook at home. Modeling this behavior will have huge implications later in life.
2. Rule of Thirds
When your children get an allowance or money for their birthday, have them split the money into thirds:
- Put one-third into a long term savings account. This can be a college savings account such as a 529 plan. If they are old enough to have a job, a Roth IRA can be a good option to save money for the long term.
- One-third can go into a savings account for short term larger purchases. This is good if they want to save up for something special like a bike.
- The last third can be their immediate spending money.
This will teach your children the importance of saving money for college and bigger purchase, while still allowing them to have spending money for those purchases that they want to make now. Splitting money into thirds is a good habit that will serve them well into the future. Its a good rule of thumb when it comes to saving money at any age.
3. Earning Money
Don't just give your kids an allowance. Have them earn it. Pay them based on the chores they do. This will help the kids realize that money is earned and not just given to them.
Come up with opportunities for your children to earn money. Whether it's chores around the house or a lemonade stand, giving children the opportunity to earn their own money really instills in them what it takes (and how long) to earn money. This can also be a useful tool when teaching about delayed gratification. If they are walking through the store and they see something they want have them work and earn the money to buy the toy or bike. It may take a few weeks (or months) but they will have greater satisfaction and understanding when they earn and save the money themselves.
It's also helpful to link saving to a goal. Sometimes it's difficult for children to understand the value of saving for an unknown. It's important to help them set specific savings goals. Set attainable short, mid and long-term goals.
4. Older Kids and Teens
Teenagers like adults are constantly bombarded with social media and pictures of their friends and strangers. Like many of us they quickly fall into the comparison trap. With a little effort you can hopefully set your teenagers up for years of financial success.
- Give them the responsibility of a bank account. Opening a checking account for your teenager will help facilitate saving money. They will also learn about how checking and savings accounts work. You can have a joint checking with your child to track spending habits. I would recommend this over a pre-paid card for learning how to set money aside and save.
- Have them help save for college. By the time your child is a teenager both you and your child should be putting a portion of money away for college. The rule of thirds works well for this (see above). Have them put away a third of their money that they save or earn for college.
- Educate them on student loans. They should know the difference between private and federal loans and how the interest can can be different depending on which one they take. This is a good time to talk about interest and how it can effect how fast they are able to pay stuff off. Not only with student loans, but credit cards. They should never take out more than they need. It can get expensive when using a student loans for living expenses. Make sure they know how much to take and what it will look like to pay them back.
- Teach them about credit cards and how it works. Especially the pitfalls. The most important lesson to learn is, it’s not your money and it's not free money, you have to pay it back. Even though your teen may not have a credit card, at some point they will and the earlier they can learn how to use a credit card responsibly the better off they will be.
- Teach them about compounding interest. Compounding interest is one of the best things a teenager and young adult can learn. The earlier they start to save the more time their money has to grow. It sounds simple and it is, let's take this example:
- Amanda, at age 25, starts saving $10,000 a year and she hopes to earn 7% annually. If she earns 7% on average she’ll have $1,382,368 at 60 years old.
- Paul, at age 30, starts saving 10,000 a year and hopes to earn 7% annually. If he earns 7% annually he’ll have $944,607 at 60.
- Bill, at age 35, starts saving $10,000 a year and hopes to earn 7% annually. If he earns 7% annually he’ll have $632,490 at age 60
These are just some of the things you can do to help your children get off on the right foot with money. The habits they learn and develop now will carry them through for the rest of their life!