Developing Your Child’s Financial Skills Pays Dividends for Life

January 2, 2020

As a parent, you have likely done your part to teach your children the importance of learning, the power of education and the benefits of physical fitness. But how much time have you devoted to teaching your children about finances?

Educating your children early about finances helps give them a firm foundation for the future, helps set them up for a lifetime of financial security and, for those with generational wealth, it can help foster and protect your family’s legacy through the years.

Here are four great ways to begin developing your children’s ability to manage finances.

Teach the Value of a Dollar

It’s never too early for children to learn the value of a dollar. The best way to teach this lesson is early through practice. When it comes to finances, practice makes perfect.

For young children (ages three to four), a great way to start money lessons is to use physical coins. They can see the coins, understand their value and place the coins in piggy banks for future use.

You can use piggy banks to teach them the importance of allocation. Have separate banks for giving, saving and spending.

As your children age, transition these piggy banks to an actual bank account. Your children will love taking part in a grown-up activity, and this feeling of maturity will incentivize them to hone their financial habits.

Show Them How to Budget With An Allowance

Teach your children to budget as soon as possible. Explain to them the difference between needs and wants. Emphasize that responsible adults use a budget to stay on track of their financial goals.

To put budgeting skills into practice, give your children an allowance; it has been shown that children who receive an allowance have better money management skills.

For their allowance, add a few caveats. For example, for every $10, have them put $1 into a “giving fund” and $1 into a “savings fund.” The rest can be allocated to spending.

To develop smart spending habits, ask your children about a big-ticket item they want to buy (for example, a bike). Help them to determine that they will need to save $x/month to purchase the item.

Your children will not only learn the importance of budgeting for short-term needs, but they will also learn how to save for big purchases. The compulsory saving instills the value of investing for the future, and the required giving allocation teaches your children the importance of charity.

To further instill the value of charity, show your children various causes they can support. Let them choose the one to which they want to contribute.

Fostering these financial management skills with an allowance will impart principles that are more likely to stick with your children until they have incomes in their own adult lives.

Encourage Money Making Activities to Develop Their Work Ethic

If your children are young, start developing their work ethic by giving them allowance bonuses for completing certain chores, such as putting dishes away, cleaning up or raking leaves.

If your children are older, ask neighbors if your children can rake leaves or mow their lawns for money. When your children are old enough to work (mid-teens), strongly encourage them to get after-school or summer jobs.

These small steps compound into a lifelong work ethic. As your children mature into adulthood, these skills will come in handy. Your children will have a greater ability to pursue money-making opportunities and will also show more grit when pursuing competitive careers.

Explain How The Power of Compounding Counters Perils of Inflation

Teach your children how purchasing power diminishes over time. For example, show how the price of common purchases, such as movie tickets and toys, have increased since you were a child.

Also, show your children how the power of compound interest counters the perils of inflation. Teach them about the Rule of 72 and how money compounding at 7.2% a year doubles every 10 years.

For older children, this may mean a broad introduction to investing. Show your children that the earlier they start saving, they more money they could have in the future.

For example, show them how saving $183.55 a month starting at age 15 could result in them having $1 million saved up by age 65 (7% annualized returns). Counter this by showing how starting to save at age 30 requires monthly savings of $555/month to achieve the same goal.

Emphasize how starting to invest immediately after college will result in stronger finances in their 30s. The sooner they understand this concept, the easier it will be to practice as adults.

Financial Skills Put Your Children Ahead of Their Peers

Teaching these concepts well is a big accomplishment, and it can set your children up for a lifetime of financial security. Beginning strong financial management practices early pays dividends for life. Your children will ultimately appreciate your role in developing their financial skills, and as working adults, they will show greater responsibility with regard to finances.

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