Tips on Teaching Kids Financial Literacy
What is financial literacy? Financial literacy is when you can understand and effectively use financial skills to make smart decisions with your money. Teaching financial literacy to your kids will prepare them for life. They will not only be able to manage their finances but also have the necessary skills for their financial future to be successful. Leading by example, giving them an allowance and tracking it, and investing in the stock market are great ways to help them become financially responsible.
Leading by Example
Kids watch us more closely than we think, including how we spend our money. Here are a few ways you can set a great example for our kids.
Discuss Wants vs. Needs
Discussing wants and needs is a great way to introduce them to how we spend money. Needs include food, shelter, clothing, gas for the car, healthcare, and education. All the extra things such as video games, designer sneakers, and the latest cell phone release are wanted. When considering getting a new item for your home or yourself, take them through your process on how you decide which item and if it’s a need or want. A great game to play with your little one to help them identify these is to go around their room and point to objects to identify them as a need or want.
Take Them to the Grocery Store
Take the kids with you when you need to go to the grocery store. To keep their interest and on task, while not goofing around, make the shopping experience a game. The point of the game is to get everything you need and stay under budget. Tell them the budget you must work with, and give them the grocery list. As you walk through the aisles, find your items and let them choose them based on your budget. Do the math, including tax, while you shop or before you get to the register to see if they win. If they win, let them decide if they want to spend the extra money on a snack, a want, or save it for next time to get a better item. If they lose, decide which items you can do without or can get at a better price. Or break it down further to separate items as needs or wants, and if needed, put back the wants. As your kids get older and can drive, they can do the grocery shopping by themselves for the household using the same method.
Give Them an Allowance & Track it
One of the best ways to teach your child about saving money is to give them their own to use. Create a chart of chores they must complete and if those chores are completed by the end of the week, provide them with money for their hard work. They can even bring this money to the grocery store if they want to spend it on an extra snack if they come up short on the family budget for it if you deem it okay.
Create a “Bank Account”
Once they start earning an allowance, they need somewhere to store that money. Before you introduce them to an actual bank account, try giving them a visual representation of where their money can go. Set up envelopes to put the money in to act as their “bank.” Label the envelopes as savings and spending and let them decide how much to put in each one. If they are saving for a “want,” such as a new video game, give them an extra envelope for that. To further the experience, offer to match their main savings to represent a business matching retirement savings. This will teach them about retirement savings for their future jobs and encourage them to save their money instead of spending it on various things. If you think they are old enough to have their own bank card, try setting up a children’s account at your bank.
Track Their Spending
Every time they spend money on an item, track it. Try putting a piece of paper in each envelope and write down every purchase they make from that envelope. At the end of the week, add it all up so they can see where their money is going. This could be an eye-opening experience to see where they’re spending too much. Are they reaching their savings goals? Please encourage them to think about how they’re spending their money and how to achieve their goals better. It’s much better to teach them how to deal with this dilemma now instead of having to face it as a young adult with no experience.
Investing in the Stock Market
Teaching your child about investing in the stock market can be a great experience. Find a brand of something they are interested in, like Legos or Disney, and track the stocks of that company. If you can afford it, buy a share in the company they are interested in. Or, if you can’t afford an entire share, purchase a fractional share, a percentage of a share. There are plenty of apps that allow you to do this. You could also encourage them to invest some of their own money for a fractional share. From there, you can teach them about risk and reward ratios to compare the expected returns on their investments with the amount of risk they take to earn their rewards.
Overall, teaching your child about the ins and outs of spending, saving, and investing money is important. If you have any questions, reach out to your financial advisor today!