Financial Competency for Children

By on July 25, 2018

All parents know that managing money and making sound financial decisions is challenging but have you passed on that knowledge and experience to your kids? It is very important that they grow up with the proper perspective on money and good financial habits, such as budgeting and saving. Make saving a fun and engaging experience so they develop the patience to earn enough to buy a new bike, video game console, or concert tickets. When they are adults with a job, college tuition and bills to pay, the time spent educating them will be worth it!

These are the fundamentals you want your children to understand and embrace to ensuring your entire family has a successful financial future.

Children Can Grasp the Financial Competency Fundamentals

Saving for a Rainy Day

Saving money can be hard for everyone, no matter what their age, but saving is the first step towards healthy personal finances. Once your kids are old enough to ask for toys, books, video games and other entertainment items, you should begin introducing the concepts of saving for the things they want to buy and consequences for choosing to spend the money now or affording something more expensive in the future.

Offering them an allowance is a good opportunity to establish a savings account which you can regulate and monitor. If you child wants to purchase a new toy, they can earn 10% of the cost each week, and it is their choice to spend the small allowance on candy or other items today or saving for that special toy. It’s best to learn from experience.

There are excellent online and mobile apps for kids to track their allowances and some experts suggest offering interest matching or savings account contribution matching to incentives you young ones to save instead of spend.

Earning your Money

Nothing in life is truly free. Help your child understand early in life that money is not hand out but earned through work – doing chores, following the rules, achieving educational goals, etc..  Try not to spoil them – giving them everything you/their hearts desire. Instead, show them where your money comes from and how you earn money to give them some perspective of earned value.

If you choose to give your kids an allowance, tie it to the successful completion of certain age-appropriate chores throughout the week – younger kids can help with simple things like setting the table, while older kids can take on more arduous jobs like mowing the lawn, in exchange for greater compensation. You may even encourage them to begin offering their services around the neighborhood to earn more for those “big” purchases like bikes or video games.

Understanding a Budget

Learning what a budget is and why it’s a good idea to have one, is one a central aspect of financial literacy. Younger children, especially, won’t realize that their parents have a limited amount of money to spend every month. The best way to teach kids how a budget works is simply to show them.

You may not have to open up your accounting books to show them where every penny of your income goes, tax plans and investment portfolios, but give them a broad sense of how adults have to divide up their money each month. Make a game out of it! Use some Monopoly money, divide up the bills to show how much you spend on your rent or mortgage, how much you spend on food, how much you save and so forth. Demonstrate to your child how much you spend on them from the money you make every month working. These games will show your children that you have a conscious plan for your money.

Then encourage your child to start a budget of his own from the allowance they earn so they can save for fun, for the future, to help the community (charitable organizations) and more. Dividing up their savings will help your child identify what they truly values so they can budget according to their responsibilities.  If you have a smartphone or tablet, try an allowance or budgeting app which allows you to directly deposit money (or points) into their account and monitor what they buy so you can discuss it with them later.

Finances for Children in Every Age Group

It is never too early, or too late, to introduce your children to money and help them build good lifelong financial habits:

  • Preschool – Practice recognizing coins and dollars to begin understanding what they are worth and which ones are worth more than others.
  • Ages 5 to 10 – Count, sort and save change. Help “manage” a family vacation or treat fund.
  • Grades 4 to 6 – Set up a savings account at a local bank and help them manage a budget of personal spending to see where their money is going (there are great mobile apps for you and your child to do this together). And have your child understand their role in helping the family save money by participating in grocery shopping or travel budget planning.
  • Middle and High School – Manage savings with an eye toward funding future needs such as clothing, school supplies and upcoming college expenses. Help them to understand financial options, opportunities and obligations of adults, including credit, credit reports and investments.

Building Good Financial Habits in Children

Set you children up for a secure financial future today. Teaching your children how to budget, save and spend with thrift are an important step to prepare them for future responsibilities. There are great mobile apps around – for those tech savvy kids – to help learn money habits or manage their allowance. And be sure to act as a good example by exhibiting good saving and spending habits yourself – your children will follow.

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