Managing Money: A Lifelong Skill Parents Must Teach
Managing money is a life-long skill, and unfortunately, it’s not prioritized within our public education system.
According to a recent MarketWatch report, only 57% of U.S. adults are financially literate. Shockingly, more than three-quarters of Baby Boomers and the Silent Generation know of 401(k)s but don’t use them. As for the youngest generation entering the workforce, over half of Gen Z is unfamiliar with Roth IRAs.
Financial literacy provides the tools to become financially independent and make smarter financial decisions, avoiding costly mistakes. A report from the Financial Educators Council found Americans lost an average of $1,506 in 2023 simply due to a lack of financial knowledge.
However, in honor of Father’s Day, let’s discuss how parents, fathers in particular, can change this by exposing their children to money management early and continuing to guide them as they grow into adulthood.
The key to teaching financial literacy to children is starting young. Here are five ways to do that:
1. Give Your Children an Allowance
Start by giving your kids an allowance for completing chores around the home, such as walking the dog, cleaning their room, and helping with dishes. This teaches the value of money, responsibility, and a strong work ethic. It also allows them to start building personal savings, which can be used to purchase something they want. Children tend to make different choices when spending their own money.
Creating an environment where they can earn and spend their own money allows them to succeed and fail under your care, making these lessons stick as they get older.
2. Teach Your Children How to Budget
Learning to create and stick to a budget is another life-long skill. Whether your child earns a weekly allowance or works a part-time job, sit down and create a budget together. This works especially well for older kids. Consider making them pay for a portion of their cellphone bill or car insurance and list those expenses in their budget.
If they can’t make the payments, implement real-life consequences, such as limiting phone and driving privileges or loaning them the money and requiring them to pay it back. This helps them understand the importance of living within their means and the consequences of not being able to pay their bills.
3. Involve Your Children in Filing Taxes
The process of filing taxes is a big concern for many Americans. A Trustpilot survey found 13% are not confident about filing their taxes, and 8% don’t know where to find the resources to file correctly. This concern is even more prevalent for younger generations. A NerdWallet report found 92% of Gen Zers are fearful about filing their taxes incorrectly, with 20% worried about facing criminal charges for errors.
Involving your children early on can help alleviate some of that stress. If you file your taxes yourself, invite your children to watch. Show them the different forms and what they mean. If a tax preparer files your returns, consider taking your child to the appointment. If your child is old enough to receive their own returns, encourage them to file with your guidance. Familiarizing them with the process will make it easier for them once they’re on their own.
4. Introduce Your Children to Investing
Learning to invest can sound intimidating, but it’s essential for building financial stability. Let your children know there’s no one-size-fits-all method. Help them identify and establish clear financial goals to decide what investments to make. Discuss their risk level and how much they can afford to invest, ensuring they factor it into their budget.
5. Emphasize the Importance of Saving for Retirement
Discuss saving for retirement with your children. If they have an employer-sponsored 401(k) plan, review it with them and encourage them to max out contributions. The growth over time is surprising. Encourage them to open an IRA if they want to take it a step further. Contributions don’t have to be huge; starting small and adjusting contributions as their income grows is smart. The key is to start saving for retirement as soon as possible.
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Teaching financial literacy to children is one of the most important lessons you can impart. It fosters a healthy relationship with money, encouraging good spending and saving habits that will last a lifetime. Normalizing discussions around money management also shows them it’s okay to seek guidance, especially when many Americans struggle to achieve financial stability.
FAQs on Teaching Financial Literacy to Children
1. At what age should I start teaching my child about money?
You can start teaching children about money as early as preschool age. Simple concepts like identifying coins and understanding that money is used to buy things can be introduced early on. As they grow older, more complex topics like saving, budgeting, and investing can be introduced.
2. How can I make learning about money fun for my child?
Make learning about money fun by incorporating games and activities. Board games like Monopoly, online money management games, and even simple activities like setting up a pretend store at home can make learning engaging and enjoyable.
3. What if I’m not confident in my own financial knowledge?
If you’re not confident in your financial knowledge, start learning alongside your child. Use resources like books, online courses, and financial education websites. This can be a bonding experience and shows your child that it’s never too late to learn.
4. How can I teach my child the difference between wants and needs?
Teach the difference between wants and needs by involving your child in budgeting for family expenses. Discuss why certain purchases are necessary and others are optional. This helps them understand the importance of prioritizing essential expenses over discretionary spending.
5. Should I give my child an allowance?
Yes, giving your child an allowance can be a practical way to teach them about earning, saving, and spending money. Tie the allowance to completing chores to help them understand the relationship between work and earning money.
6. How do I introduce my child to investing without overwhelming them?
Start by explaining the basic concept of investing and its importance for financial growth. Use simple, age-appropriate language and examples. You can also open a custodial investment account and involve them in the decision-making process for choosing investments.
7. What are some good resources for teaching financial literacy to children?
There are many resources available, including books like “The Opposite of Spoiled” by Ron Lieber, websites like Investopedia’s Financial Literacy section, and educational programs such as Junior Achievement. Additionally, many banks and credit unions offer financial education resources specifically for children.
Teaching financial literacy to children is a crucial step in preparing them for a successful financial future. By starting early and using practical, engaging methods, parents can help their children develop a strong foundation in money management.
