Of all the lessons we can teach our children to survive in the world, the value of a dollar might just be one of the most important. A recent Journal of Consumer Affairs study found that nearly 3 out of 4 Americans between the ages of 23 to 28 are unable to answer basic questions about economics and investing. As I watch more and more of my clients become financial caregivers for their adult children, I’m not surprised.
In an era of six-figure college loans, high unemployment and a recession that won’t go away, money management is an essential life skill. Here are a six ways to teach your child the art of financial responsibility:
1. Start ‘em Young. If you ask a 5-year-old what his parents do to earn money, he may tell you he doesn’t know or may tell you, “They go to an ATM.” Explain that people have to work for their money – but if they save and invest rather than spend it all, the money will work as hard for them as they work for themselves. Play board games like Monopoly, Thrive Time or Charge Large to help your child get excited about earning and saving money. Or check out some of the free financial games online, like FedVille.
2. Open a Kiddie 401(k). Demonstrate the concept of compounding interest by opening a savings account with your child. Offer to match 50 cents for every dollar she saves and agree upon a “vesting” period that supports her savings goal. Be sure to allow some withdrawals, so as not to discourage her from saving at all.
3. Extol the Beauty of a Budget. Teach your child how to set a budget. Discuss the difference between needs and wants and the rewards of delayed gratification. Then give him a consumer challenge. Take him to the grocery store with a shopping list and $20. Show him how he can save by using sale circulars, coupons and generic products. After he’s done shopping, put whatever money is left over in a jar. Following a few more trips or when enough money accumulates, let him deposit half in his savings account and use the rest to buy a treat or give to charity.
4. Warn Them About Credit Cards. According to a Financial Industry Regulatory Authority (FINRA) Investor Education Foundation survey, nearly three-quarters of Americans have credit card debt. Of those, more than half carry a balance and pay interest each month − with 40% paying only the minimum due. Let your child know that if not used responsibly, credit cards can be hazardous to their wealth. Explain how the credit card companies make money, using examples she can relate to. For instance, let’s say she charged a $328 electric scooter to her credit card and took five years to pay it off, making minimum monthly payments. At the average interest rate of 15 %, that scooter would wind up costing her $427.
5. Take Stock. Form an “investment club” with your child where you research stocks and discuss them at regular “meetings.” Start with companies they are familiar with. Teach him to look up the stock symbol, and follow its progress. My kids look forward to watching their stock picks. Open the club to all family members and organize a stock-picking competition, similar to a football pool. If you’re feeling especially generous, open a UGMA/UTMA/custodial account so your child actually owns the stock and has more skin in the game.
6. Demonstrate the Rewards of Giving. Show your child the joy of sharing one’s wealth. Bring her along when you donate items to the local food bank or volunteer at a soup kitchen. I do this with my children, and it has become a meaningful family experience. Talk with her about people who are in need and causes she might want to support. Each time you give her a monetary gift, offer to match any portion she chooses to donate to charity.
Sharing these lessons and experiences on a daily basis with your children will help them learn sound savings, investment and stewardship principles – helping your child develop a good head for money as well as a good heart!