Teaching Children to Manage Their Own Money
Teaching children the value of money and how to properly manage their money is critically important. Parents who invest in this type of education help to ensure that their children develop life-long habits that can sustain them during lean times and provide them with incredible life experiences when times are prosperous.
ALLOWANCE AND OTHER SOURCES OF INCOME
It is never too early to start assisting your children on their journey toward sound fiscal practices. Instituting an allowance is a great way to begin. By providing children with a steady income of their own, you are giving them something to manage. Like a salary, it should gradually increase over time. You may decide to increase it as their level of responsibility within the home increases or as they achieve educational goals (i.e. making an A in challenging classes, achieving an established GPA, etc.) If you increase allowance over time, be sure to offer insight into how adults receive salary increases to compensate for inflated cost of living and taking on more responsibility at work. Other income might include money from a part time job, babysitting income, and gift money for birthdays, holidays and other celebrations.
Because parents typically contribute money to their children's social outings it is wise for them to include a set amount each month in their own budgets for these expenses. The parents' expense becomes the child's income. If you decide to adopt this practice, it is important not to contribute extra money each month. If a child's social expenses for a month do not equal the amount of money that was provided, the child comes out ahead. If their expenses exceed their social income, their savings will begin to erode.
ESTABLISHING A BUDGET FOR INCOME AND EXPENSES
Once your child has an established income you can begin to teach them about budgeting. Assist them to compile a list of expenses relative to their income. Their list might include money for going out with friends, money for non-essential clothing, money for charity contributions or other items they deem important. It is also critical that if children want to purchase large ticket items, you assist them to budget an amount each month that will lead them toward their goal.
To offer more practical life experience in fiscal management involve kids in everyday activities that include spending money which has been budgeted for a specific purpose. Such things might include grocery shopping. Tell your kids up front how much money you intend to spend at the store. Involve them in creating your weekly or biweekly menu, grocery list, clipping coupons and so forth. When you go to the store, have kids identify product prices and use a calculator to help keep track of expenses as you shop. If you exceed your budgeted amount, allow the children to help determine which items to put back. You may also allow kids to have a basic overview of the family budget. It is important from a young age to become aware of what normal family expenses are, including mortgages/ rent, automobile expenses, utilities, groceries, insurance, etc. Children should not be burdened with troubling family finances, they should merely have a basic understanding of the types of expenses that exist for adults. This will help them to understand the importance of the educational journey they are embarking on with your help.
SAVINGS AND INVESTMENTS
Income and expenses are only a portion of their overall budget. Children should also learn the value of saving for a rainy day. This money is that which is saved in addition to what ever large ticket item they may be saving for. Many families have had parents that have been laid off or otherwise lost a large portion of their income. In order for families to survive, it helps to have had investments or savings to draw from. You might instill in your children, the notion that life occasionally throws curveballs. We cannot necessarily predict what those might be, but unemployment (for adults) is a good example of that. For children, there may be unexpected invitations to take trips, purchase new technology or other items that they would otherwise not be able to afford. Having long term goals such as saving for a wedding, college, a car, or other similar item should be viewed as very important. Savings accounts for such purposes are a good idea.
If your child is saving a portion of their income, it is wise to assist them to open a savings account at your local bank or credit union. This will provide an opportunity for them to receive statements, learn how to read the statements, gain experience with depositing and withdrawing funds, and learning how interest works. When children can see monthly statements, they have a visual image of their money that leaves a lasting impression. As the numbers grow, kids become more committed to saving. They begin to correlate the higher interest amounts with the growing amounts in their accounts. This provides another opportunity to talk about how money grows in other fora such as IRAs, money market accounts, CDs, stocks, and bonds.
CHECKING/ DEBIT ACCOUNTS
Offering teens the opportunity to open a checking or debit account is a great idea. It provides another opportunity to receive statements, watch one's money grow, earn interest, and manage income and expenses in a more adult fashion. It also helps to avoid having kids carry large sums of cash, risking loss or theft of their hard earned/ saved income.
It is critical that children be taught the value of community service and charity. Many families set aside a portion of their income for charitable contributions and it would be wise to instill those values in the children. The charitable contributions might be to their church or to a charity of their choice. It is important that children select the charities of their choice and not necessarily the charities that their parents support. This provides a great opportunity for parents to talk with children about the less fortunate and to ask your kids what causes they deem worthy and why.
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