My daughter Sophie, who is in year one, has been learning about money at school. They’ve made money boxes that sit on their desks and they appear to be earning (plastic) money. I’ve heard talk that this money will be used for a princess ball – but I’m not sure what the class princes and knights will be doing. Minor detail!
Teaching children about money is essential. Recent Federal Governments have recognised this and financial literacy is finally being incorporated into the national curriculum.
Recently a journalist interviewed me about what parents can also do to teach their children about money.
In my view by far and away the most important thing you can do to teach your children about money is to be an excellent role model.
I’m not a parenting expert, but what I’ve learned from such experts is that a lot of the things my children will learn from me will be through imitation – including my bad habits.
In contemplating how to teach your kids about money the place to start is reflecting how competent you are in managing your money.
If you’re not sure how to assess your competence try my free financial health check – it’s quick and online.
What to teach your kids
The most fundamental financial skill is managing your cash flow. The outcomes of good cash flow management include:
- You consistently spend less than you earn
- You have money for those things in life that really matter to you
- You regularly save
Through modelling and mentoring show your children:
- How to smooth out their lifestyle so that it’s not feast or famine based on what bills are due that month.
- How to prioritise their wants so they get the biggest and most lasting enjoyment from their purchases.
- How to save up for things they really want but can’t afford right now.
- How to think ahead by planning for the predictable. (e.g. school holiday activities with mates, getting their licence, graduation ball, schoolies week.)
- How bank accounts and interest works so they start to learn how to make their money work hard for them.
- How to manage true emergencies without stress by having a pool of dedicated savings.
Teach kids to spend less than they earn
Since young children don’t have credit cards it may seem inbuilt and automatic that you are teaching them to spend less than they earn in pocket money.
Children do have access to spontaneous, large bonuses, which they typically earn through whining, guilt trips and other weapons in their arsenal.
Whenever we cave in they learn that not having the money is not a problem.
When they eventually do get a credit card it’ll become an extension of their income that is quickly soaked up. So, they’ll get another, then another…
Enter, Mummy & Daddy to save they day so that our kids don’t ruin their credit rating. And the pattern repeats – just on a grander scale.
Saying no now is teaching them a valuable habit.
When my 6 year old daughter, Sophie wants me to top up her saved pocket money so she can buy something I explain that I don’t want to spend my pocket money on that item. I explain that instead I have more important things I want to spend my pocket money on, and try to weave in a recent example. It’s early days but so far she seems to understand.
Teaching kids to save up
To teach children how to save up I suggest you:
- Start with small amounts
- Make the items tangible and meaningful to your child
- Use non-essential, truly discretionary items so you won’t be tempted to give them an unearned bonus.
When we introduced Sophie to pocket money she naturally asked what she could spend it on. She loves having a lunch order at school but our rule is that she can have one per term – usually in the last week. I suggested that she may like to save her pocket money for an extra lunch order per term and then helped her count the weeks she would need to save.
For older children the important things they really want may cost more and take longer to save for. You can help them learn how to avoid painful disappointment by helping them predict then plan for the predictable.
For high school age students one year is probably a reasonable time frame for them to be able to look ahead. At least every three months do a rolling one year look ahead of the things they really want to do and own. For example:
- School holiday activities with friends
- The latest gadget. You may not know what it will be but sure as the sun rises in the east there will be a hot gadget arriving.
- Graduation ball (think expensive outfit, limousine and after party)
- Schoolies week
- First car (make them save for this rather than give it to them. It’s too good an opportunity for a valuable lesson.)
Of course the essential next step is to regularly set aside dedicated amounts to save up for each of the items.
Teaching kids to prioritise their wants
For older kids the one year look ahead will also help them prioritise their wants. Every time they want to spend their money on something more trivial remind them of the items on their one year plan and ask the open question “is this new item more important than these items?”
I believe the same can apply to younger children; you just need to shorten the time frame, which is what we’ve done at home.
Here’s one way I tried
To date Sophie hasn’t saved enough for a bonus lunch order. She keeps spending her pocket money on other items.
One early purchase she blew her money on (IMO) was a junk toy from one of those dispensers they have in shopping centres. (Those things had always been a firm no from Dad no matter the whining, so it was no surprise she indulged when given the chance.)
I think it was a matter of days before the toy was lost or forgotten.
A few weeks later a toy catalogue came home from school and Sophie really want a book she saw that was about a girl named Sophie. The problem was that she didn’t have enough pocket money left to buy the book.
It actually looked like an appropriate book to help her with literacy and I know how she loves to read and re-read her books. But I decided not to cave and give her a spontaneous bonus.
Instead I used the opportunity to remind her of where she had spent her pocket money and explain how that related to not being able to have this new item she really wanted.
Since then there has been a few other learning opportunities and I think (hope) she is catching on.
Involve them in the family budget
If they’re old enough to have a part-time job then I feel they’re old enough to see the whole family budget – warts and all.
Give them the opportunity to discover how much life really costs, including that roof over their head, the fully stocked pantry, funky fashions and their education.
Show them how you’re working out what amounts to set aside for future bills and for unforeseeable emergencies.
Explain to them how you decide what you can afford and what you can’t afford.
All of this is very hard to learn well if you are thrown into the deep end when you move out of home. Mistakes are easy to make and can be costly.
Give your kids a great start in life by giving them the gift of financial literacy while they are still young and at a home.
The best way you can do that is by being a great role model.