Friday, 9 November 2018
It's not easy being a parent! It can be tough managing your finances, let alone teaching your children good financial habits.
So how do you teach your kids the lessons they will need to achieve lifelong financial success when you're dealing with limited time, energy, and expertise?
The good news is that you are already your child's first teacher in all things, even financial literacy. More good news: As Dr. Benjamin Spock told parents decades ago, "You know more than you think you do."
Let's define financial literacy. In 2008, the President's Advisory Council on Financial Literacy defined personal financial literacy as "the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being." We'd like to share our favorite tips on becoming your child's first financial coach. You can help your child to become a star financial player, even if they're very young and the dollar amounts are very small.
Parents often feel that children – especially their own – act as if money grows on trees. It's easy enough for a child to think that money is limitless, since they see their parents pay for everything. Even very young children can understand concepts like "work" and "reward." Explain to them that you "work" to earn money (the "reward"), and that this money has to pay for everything you buy: food, housing, cars, and even toys. Once the money's gone, it's gone – until you "work" enough to make some more.
A weekly allowance, even if it's very small, will help your child discover the ability to save and spend thoughtfully. Putting your child in charge of even a small amount of money gives them "skin" in the game – which fosters a sense of financial responsibility and control. Set up ground rules based on your family's individual resources and values. For example, is the allowance tied to chores – or not? Is it to be used for "necessities" (like lunch money) or for "fun" things? Is a portion to be given to charity? Have open discussions about what you expect and will allow.
Young children quickly grasp the idea of saving, and like to see how a savings account balance grows. Make the trip to the bank to open the account a special day. A savings account will help your child understand the value of long-term planning, as well as gain the satisfaction of saving. It's a lesson we could all take a page from; a recent study by the Employee Benefits Research Institute showed that seven out of ten Americans don't save enough. Consider making deposits to their savings accounts part of any gift-giving occasion.
Kids love stories, so use them! Many fairy tales extol the benefits of hard work and patience: remember the Tortoise and the Hare, the Red Hen, or Cinderella? Use stories about successful, hard-working family members or other inspirational figures who achieved success through hard work and discipline. If you see an article in your local newspaper about a successful entrepreneur, read it aloud to your kids. And don't forget about the power of example: If you don't walk the walk, they won't listen when you talk.
5. Help them dream big, realistically
Children need help setting their first financial goals, whether it's to save for a special toy or to buy their first car. Show them the ropes and help them to structure a realistic plan that will let them achieve their goal(s). Help them get excited about saving! Tools like age-appropriate sticker charts that measure savings progress, and computer spreadsheets are readily available (and often free). Work with your kids to develop a plan that will motivate them to save money and have fun while doing it.
Tap into the feelings you had when you bought your first bike, car, or saved enough to pay for a special item or trip. If your child manages to put even a little bit aside for a special purchase, do something to celebrate – even if it's just acknowledging their success in front of the family.
Let's face it; we're all going to fumble the ball sometimes. Use your child's inevitable slip-ups as an opportunity to encourage them to get back up and try again. If they spent their savings on some silly (by your standards) impulse buy, encourage them to start saving again. Use your own behavior to demonstrate the importance of bouncing back from setbacks. If you can pass on the impulse purchases and/or admit to your own errors, they're more likely to do so as well.
Financial terms are sometimes described as a "foreign language." Kids need help to learn this new language, but they are eager to learn! The difference between a credit and a debit card may be too sophisticated for a 5-year-old, but they can understand ideas like cash, borrowing, and savings. Older kids will want, and need, to learn concepts such as compound interest, overdrafts, transfers, stock, and bonds. Regardless of age, try to explain things in clear, simple terms. When possible, use physical items such as cash, credit cards, or bank statements to explain financial terms. Worried about your ability to explain terms? There are numerous free online resources that explain financial terms for kids. Use them – and don't forget your BBVA Compass banker and/or website as resources too.
Talk to your kids about what matters to your family. If charitable donations are important, encourage your child to contribute to a charity that interests them (e.g. animal lovers may favor the local Humane Society). If education is important, help them to understand that college and vocational classes cost money, but can also greatly increase earning potential. Show them the college savings plans you've already started for them, and have them contribute toward it. It all depends on what matters to you and your family!
The content provided is for informational purposes only. Neither BBVA Compass, nor any of its affiliates, is providing legal, tax, or investment advice. You should consult your legal, tax, or financial advisor about your personal situation. Opinions expressed are those of the author(s) and do not necessarily represent the opinions of BBVA Compass or any of its affiliates.
Links to third party sites are provided for your convenience and do not constitute an endorsement. BBVA Compass does not provide, is not responsible for, and does not guarantee the products, services or overall content available at third party sites. These sites may not have the same privacy, security or accessibility standards.
The kids are out of school, but you still have to work? Here are the options for designing a fun, affordable summer of childcare.
Thinking about asking a family member for a loan? Here are some tips for borrowing from relatives without straining relationships.