- Guest Post by EW Taylor
Money is one of the major things that empower both young and old people to make decisions that affect their lives. One can only be able to live a comfortable adult life if they are able to keep a large percentage of the money they earn or if they can stretch their dollar on the things they purchase. All this requires early education and motivation to save and invest. Day to day spending and the decisions made on savings and investment will play a major role in determining a child’s financial future and quality of life as an adult. The good news is that any child can be taught the basics of managing money and personal finance.
Start As Early As Possible
Introduce your child to the different concepts that relate to money as soon as he or she can count. Children learn as they grow through observing and repeating what they see, so you should take an active role in making sure they have knowledge and information on money, business, savings, and investment. Make sure that your personal values about saving money, making it grow and wise spending are clearly communicated. By helping them to identify the differences between what they may want, need, or wish for, they will be better prepared to make wise spending decisions in future.
Teach the Importance of Setting Financial Goals
In almost all areas of life, people rarely make major achievements without having set them as goals first. Personal finance and investment is no different. Being able to determine financial goals is the foundation upon which a kid can build an understanding of the value of money and savings. Almost any item or toy that your child asks you to buy can be used as the object of a lesson in goal-setting. This will help a child to learn to be responsible for their financial decisions.
Demonstrate the Importance of Saving Money
Whenever possible, find ways to show your kids the importance of saving more money than they spend, and the advantages of having a healthy nest egg. You can also demonstrate and explain how the interest on savings can be an extra stream of income. You could do this by paying interest on the money they save in a piggy bank; have your children participate in calculating the interest to demonstrate how quickly money can accumulate through compound interest. As they continue to save, they will realize that the quickest way to obtain a good credit rating is through regular and successful savings. To encourage kids to save, you may even choose to match what they manage to save on their own.
Encourage Your Child to Open a Savings Account
The key to future success in savings is beginning the habit early and being familiar with savings institutions. For this reason, one of the most important steps you can take is to take kids to a bank or credit union to open their own accounts. Remember that you want your kids to have knowledge of all aspects of personal finance, so do not refuse if they ask to withdraw some savings to make a purchase, as they may be discouraged from saving if they cannot benefit from their money. It will also provide a valuable lesson in how savings can help them achieve their goals.
Link Allowances to Savings and Spending Decisions
When giving your kids an allowance, make sure that the cash is in denominations that encourage them to save. For example, if your child’s allowance is $5, break it down into 1-dollar bills so that you may encourage them to set aside at least a dollar in savings. A saving of $5 every week at 6% compound interest calculated quarterly will come to a total of about $266 after one year and a whopping $3,527 in ten years!
Encourage Kids to Keep Records of Savings and Spending
Keeping accurate records of money that is invested, spent, or saved is one of the most important skills in money management that everyone – young or old – must learn. Make the process of keeping records simple for your kids by using 12 small envelopes, with one for each month and a different, larger one for the entire year. Ensure that you establish a system for each child. Kids can then keep track of their finances by placing receipts in the appropriate envelopes after each purchase they make. They may also place notes about what they do with their money in the envelopes.
Let Kids Learn From Their Own Decisions
When young people are given the freedom to make their own choices when it comes to spending their money, they learn from both the good or poor decisions and are wiser for it. You may then discuss the consequences of their decisions, identifying the pros and cons before they spend on another purchase. This will motivate children to use common sense when deciding what to buy. They will learn to carry out adequate research before they make any major purchases, be able to wait for the right time to buy and avoid spending on impulse. An effective way to reinforce these traits is to give the child a choice of several things they could purchase with their money, and helping them decide on the pros and cons of each.
Teach Kids to Evaluate Ads and Offers
Some of the poorest financial and spending decisions are due to unrealistic promises in flashy and captivating TV or radio ads and glossy brochures. Teaching your kids to identify whether a product really performs as advertised or whether the sale price is the only cost will make them wiser in making purchasing and investment decisions in future. They will also better identify alternative offerings that offer more value or do more for a lower price. One of the most important lessons they will learn is that if a product or service sounds too good to be true, then it probably is. Learning to process information and read the fine print will enable kids take on greater responsibility in ensuring their own financial well-being.