This financial literacy month, help set your child up for financial success
Most of the news during financial literacy month covers adults - and rightfully so. Roughly half of American adults can’t afford a $1,000 emergency! (2021, Bankrate) What many don’t realize is that part of the personal finance crisis in America is due to inadequate teaching. Not convinced? We’ll make the case for why it’s important and share tips for how to start teaching your kids today.
For the skeptical: Why teaching our kids money foundations is incredibly important
Personal finance is made up of two parts: theory and behavior. Education in the classroom is limited to theory -- and that is if it is even taught. Only 18% of U.S. high school students are required to take a personal finance course (2020, Montana University). With many schools not teaching theory, it falls to parents to teach their kids about money.
On the behavior side of personal finance, it is up to parents to instill their children with smart habits and control over impulses. This starts earlier than you may expect -- children form opinions and habits around money as early as seven years old (2013, University of Cambridge)! Aspects of personal finance can be like exercise; knowing what you should be doing doesn’t mean that you actually follow through. It’s important to instill these habits early.
What should I teach my kids?
Before diving into strategies to teach your kids about money, it is important to think about what skills you want your child to master. Here’s our list:
Control impulses and differentiate needs from wants
Spend money only on things that TRULY make us happy
Think about money and wealth from a long-term perspective
Master compounding interest and investing for financial freedom
Where should I begin?
1) Empower your kids with money decisions
Giving your children their own money and letting them decide how and when to spend it gives them an opportunity to practice making financial decisions and learn from any mistakes they will make. Through practice, your child will become better at prioritizing their wants, overcoming impulses, and figuring out what spending actually gives them joy.
2) Coach your kids during and after purchases
Your coaching is imperative to helping your child improve their decision making. When your child is considering a purchase, ask guiding questions, such as: are there any things you’ve been wanting for a while that you haven’t had the money for? Are there any lower cost or free alternatives that would give you the same amount of happiness?
A week or two after a purchase, encourage your child to reflect on their spending. Did the purchase give them the happiness they were expecting? Would they have made a different decision, knowing what they know now?
3) Incentivize long-term saving
Incentives come in many forms but it is important that your child sees how savings over time can build up. One easy incentive is to help your child define a long-term savings goal that they can strive to achieve. A long term goal will help encourage saving and serve as a good coaching discussion point when they’re considering buying something new.
We also recommend providing a rate of interest to your child - not the barely noticeable 0.5% that a normal bank provides, but 10 - 20%. This higher return will teach kids that money can work for them (i.e. investing) and help them understand the power of compounding interest.
4) Be a positive role model
Our kids are always observing us and many learned behaviors are imitations of parents. To be a better role model you can become more conscious of your spending habits - do an inventory and start coaching yourself! Something else we suggest is openly communicating your thinking to your child. Rather than keeping thoughts inside your head, voice your inner monologue when you decide to forgo something that you want.
Accelerate learning with a digital savings tracker
Guardian Savings is helping parents raise money savvy kids through an educational, fun, and transparent app that empowers them to make worthwhile financial decisions on their own.
This digital savings tracker teaches valuable and practical money skills by always being accessible when your child wants to buy something. In addition to incentives, such as parent funded interest, it also has an interface that is designed to shift and subliminally nudge your child’s thinking towards responsible habits.z