That lesson is about money. But don’t panic—it’s never too late to begin.
Teaching kids how to manage money in today’s world is a lot different from what it was 20 years ago. Today paying by cash is notably rarer, and it’s getting more difficult for kids to learn the essentials of becoming financially savvy. Still, we can’t deny that when there is a challenge, there is a way to overcome it. In this instance, the opportunity to provide financial education to your kids sets them on the path towards smart money choices, and a secure financial position later in life.
International monetary systems have gone through many changes over time, moving away from their ties to gold. The consequence of each government having its own foreign exchange policies is that the value of each currency fluctuates with global economic activity and its impact on each nation. On the other side of the coin, we and our children now have many more options to grow our savings from opportunities to invest in markets that may not have been available before.
Research indicates that financial problem-solving and decision-making processes can be affected by psychological, social and cultural factors, as much as education at school. Kids are experiencing a financial crisis that will affect their economic and financial worldviews well into the future, and it is up to parents to guide them through these tough economic conditions.
So how can parents help their children traverse this challenging landscape?
Why should you talk to your kids about money?
When children learn about money at an early age, it’ll be less challenging as they get older. Given that age eight is when most kids already possess the necessary maths skills to help them understand expenses, the sooner you can start talking about money, the better.
It helps to make talking about money a part of daily life. Use available learning opportunities to your advantage, such as suggesting that your kids pay for their tuckshop orders out of their piggy bank. This easily teaches kids the earn-and-spend rationale. If finances are made relevant to children at a young age, they will become more curious about it and feel more inclined to talk about money as they get older.
Financial literacy will help kids to accept monetary hurdles as they come across them, such as setting limits, planning a budget, and resisting impulse buying. Kids will also learn the fundamental aspects of their personal finances, along with how their finances can impact their place in society.
5 ways to start talking to your kids about money
Even if you haven’t actively taught your kids about money, they will still learn about finances one way or another. If you choose to play a leading role in your child’s value formation and motivations about finances, you need to start teaching them early on. We’ve shortlisted five tips on how you can talk about money with your kids.
1. Show your kids how money moves in real life
An important criterion of teaching kids’ responsible financial habits is to be sure that you model the behaviour yourself. Kids are curious beings, so don’t be afraid to narrate your spending choices as they happen. Explain why you made the purchase, and where the money comes from (cash or bank account). Provide your rationale for why you chose a particular product over another (was it on sale?).
Model good behaviour and offer lived opportunities for kids to experience—both good and bad. This can be done by establishing a savings plan that helps children understand the impacts of money on their lives, and in this respect, it is the best way to help them learn how to manage budgets and handle delayed gratification.
Consider this an opportunity to reflect on your own behaviour as it relates to your finances. What have you learned about yourself and your attitudes toward money? Can you share advice with the kids to model better financial habits?
2. Explain how you earn money
Tell your kids how you actually make your money, in terms they understand. You receive a certain level, and it accounts for other goods such as food, petrol, and utilities. Explain the difference between needs and wants and encourage your kids to make good decisions before spending any money. Renowned financial expert Scott Pape, better known as the Barefoot Investor, explains, “It’s not about the money, it’s about behaviours.”
He suggests a simple and tangible learning experience, called the “save, spend and give” jar approach. The idea is that as your kids complete chores or small tasks, they divide their earnings between three jars which provides them with a chance to gain knowledge about money management and offers a visual representation of where their money is going.
3. Be open about your priorities
Kids need to understand why their parents choose to go without purchasing a particular thing while purchasing other items. Handling monetary issues is the first step toward creating a budget. No one should ever spend money impulsively, and it’s good to think about what matters most in life and ensure that you are putting your money in the right place.
Learning how to set priorities may also be an important lesson for your children. If you explain to them, for instance, that you decided not to buy a new pool because it’s more important to save for their university education, that message will resonate.
To date, the pandemic has shown us that when our financial position is at stake, discussing money can be a challenge. To shield ourselves from the shame and criticism of others, we may put up walls. Once you can overcome this fear and have frank, candid, and nonjudgmental conversations, the result will be dramatically improved self-awareness and financial confidence—for both you and your kids.
4. Help your kids set bigger goals
The simple concept of being able to budget efficiently, saving and comprehending the ramifications of poor financial choices are important lessons that children of all ages need to learn. A good learning opportunity to offer kids is working towards a particular financial goal.
Practising the habit of saving money can become a beneficial method for the development of healthy financial savings long-term, by helping children set achievable financial goals. This could be a new toy or activity that is not easily paid for with allowance money.
If they know what it is they want to save for, help them break down their goals into manageable steps. For example, if they want to buy an $80 scooter and they earn $10 a week in pocket money, help them figure out how long it will take to reach their target. Setting goals is a useful way to get kids motivated and to consider their needs over their wants.
5. Introduce your kids to investing
Following the save, spend and give concept, you can replace ‘give’ with ‘invest’ to put away money so it can be used for other things in the future.
Among the major advantages of getting kids started with investing is the opportunity to earn compound returns over a lengthy period, which increases the likelihood that they achieve financial security earlier than if they started at a later time. Somebody who is a consistent saver as a child (and remains one early on in their career) is very likely to be in a strong financial position when they choose to retire.
An important factor to consider when you are speaking with your children about investments is the volatile financial landscape of today. It’s not simple to control inflation and banks typically raise interest rates in order to stabilise things. This further impacts the value of fiat currencies that depend on the policies of issuing financial bodies. Stocks and bonds are no longer the only options kids can use to grow their savings, and they can look to precious metals such as gold to protect their wealth.
Kids have many years to invest, supplying them with the time they need to recuperate any short-term losses that might arise due to market fluctuations or economic downturns. Having a long-term perspective can be considered an asset when it comes to being a good investor, and kids are uniquely positioned to understand this concept.
At the end of the day, one of the hardest parts about teaching kids about money is that they will inevitably make mistakes, which can result in real, tangible financial loss. The key is to nurture your child’s financial literacy from a young age, encouraging healthy habits, setting achievable goals and offering real-world examples to support their learning to the best of your ability.
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