Put your money where your mouth is
How to teach children about finances
• By Rebecca Long Pyper •
With money — or disagreements and stress about it — being one of the top reasons for divorce in the country, teaching kids about finances is a must and can give them a head start in the right direction. Connections Credit Union financial advisor Brian Singleton offers these tips for financial education at home:
1. Start small. Parents can begin financial instruction when a child is as young as 3. “The longer the child has to practice good money habits, the more likely they will be able to master them when they are out on their own,” Singleton said. Use real-life situations as teaching moments rather than relying solely on serious, sit-down discussions.
2. Budgeting is a must-master topic. Just because kids have money doesn’t mean they need to spend it. Encourage them to save a little every time they receive any. “Seeing that Americans aren't great savers, I think the principle of saving a portion of your money puts your child ahead of the pack when it comes to financial success,” Singleton said.
3. Instruct them to avoid debt. Singleton said that, yes, people usually need loans for things like houses, but it’s important to be responsible when selecting the types and amount of debt accrued. For instance, teach kids to opt for an affordable home — never more than 33 percent of their net paycheck and ideally closer to 25 percent. Tell them that a modest vehicle is okay; some experts recommend that buyers only select vehicles with a price tag equaling one-eighth of their annual income. Encourage children to plan for college, but discuss student loans and how best to tackle (and spend) them. Other, extra stuff — vacations, groceries and toys — should be bought with cash, not borrowed money.
Of course, one of the best ways to teach about living a reasonable lifestyle is to walk the walk. Kids will spend as they see their parents spending. Set a good example by paying off debts as quickly as possible — and it’s okay to tell your kids that’s what you’re doing.
4. Offer allowance responsibly. Singleton is not a fan of handing out money just because, so if you’re going to dole out cash, make sure your kids earn it. “I want to teach my kids the principle of self-dependence, and just giving them money seems to go against that idea,” he said. “For your children to truly value the money they have, working for it seems to give them the best mindset.”
5. Help them establish short- and long-term savings. For money that will likely be spent in 12 months or less, a piggy bank or wallet is just fine. But for kids to learn about growing their money, help them set up an account with a financial institution. According to Singleton, credit unions typically have lower fees and better savings and loan rates, but many local and regional banks are also competitive; compare options to see what fits your family best. Rates are currently so low that compounding interest isn’t significant, but “putting (money) in a financial institution requires your child to do a little more work to get at the money and a little more thinking before they make a purchase,” he said. “Additionally, the money doesn't get lost or accidentally co-mingled with other siblings’ funds, which can turn into a fiasco.”
6. Encourage them to give charitably. Help kids choose a way to help others with their money, whether it be through paying church tithes or donating to United Way or Salvation Army. “Studies have shown that those who regularly give to a charity have a higher likelihood for financial success,” Singleton said. “More importantly, it’s important to teach your kids that money isn't everything, and sometimes you can find a lot more happiness with money when you simply give it away to a good cause.”