Contrary to popular belief, when it comes to teaching kids about money it is never too early to start the conversation. In fact, you can start teaching kids around pre-school age simple money concepts that can later become the building blocks for more in-depth financial discussions in the future.
If building and sustaining generational wealth is your goal, it won’t be enough just for you to have good money habits, you’ll also need to inculcate those same habits in the next generation. So, here are 10 money lessons you can teach kids today that’ll serve them for a lifetime.
1. Pay Yourself First
Teaching kids how to save money is arguably the most important money lesson you can teach them because learning how to save money is a foundational skill that every other financial ability is built on.
The first step in the journey of teaching the habit of “paying yourself first” and saving money is to use a piggy bank. The piggy bank is a great tool for teaching kids how to save because the money that goes in the piggy bank can’t come out until you break it, and that should only occur once the kid reaches their savings goal. When the kid is older and has more money, you can then explain to them how to use a checking or savings account and open one in their name.
Learning how to save at an early age will do more than just teach the kid how to save money, it’ll also teach them valuable life lessons such as the importance of delayed gratification (the ability to postpone an immediate gain in favor of greater and later reward), self-control, and patience which are keys traits to wealth building.
If you’re interested in learning more about have to develop these values in children, David J Bredehoft Ph.D., has a powerful article on Psychology Today where you can learn more about strategies to teach children delayed gratification.
2. Money is an Exchange of Value
Allowances are a great way to teach children about the value of money at an early age. Allowances shouldn’t just be given though, they should be earned through chores or other helpful tasks around the house.
Through an allowance, you can show kids firsthand that money is an exchange of value. When one person values the service that another person can provide, they exchange money for that service, that money can then be used as a tool to accomplish your own financial goals and fulfill your needs and wants.
An allowance is also a great way to teach your kids money management skills, help them develop a sense of independence and self-reliance, and start them on the path towards being proactive in their own wealth creation. There is no better way to teach the value of a dollar than to earn it yourself.
The sooner you can expose a child to the concepts that money is an exchange of value and a tool for accomplishing financial goals, the easier it’ll be to help them develop a healthy work ethic and understand that money doesn’t “grow on trees” — it takes effort.
3. Create a Budget
A budget serves as a roadmap for your money. Without a budget, you don’t know where your money is going or why it’s going there. An easy way you can introduce budgeting to kids is to use the three-bucket method: one bucket for saving (50%), one for spending (40%), and one for giving (10%).
Every time money is received it should be divided into these three buckets based on the percentage assigned to each. For example, if the child receives $100 for their birthday $50 would go into a savings account, $40 would be available for spending, and $10 would be set aside for giving to cause they care about.
The buckets and the percentages assigned to them reinforces the importance of saving money for the future, let’s the kid know that it’s okay to spend their money on things they enjoy in the present, and that giving is a virtue that must be practiced not preached.
Some additional lessons that can be taught through a budget include:
1. Teaching kids how to “pay themselves” first by making savings the #1 priority.
2. Learning how to budget money, plan for the future, and practice delayed gratification.
3. Helping kids learn the difference between wants and needs, and how to fight impulsive behavior.
The sooner a kid can learn how to budget their money, the sooner they’ll be able to make wise financial decisions that’ll keep them out of debt, saving money, and reaching their financial goals.
4. Set Financial Goals
Part of being a financially responsible adult is learning how to plan and save for short-term and long-term financial goals. You can begin teaching kids how to set financial goals by having them save money for a big purchase they might want. Help them map out how much they’ll need to save, how they’ll earn the money to make the purchase, and how long it’ll take for them to reach their saving goal.
By developing the money habit of setting financial goals at a young age, you can help ensure the child develops good discipline, self-control, and goal setting skills when it comes to money matters.
5. It is Okay to Talk About Money
Many families find it taboo to talk about money, especially with children around. While children don’t need to sit-in on every financial discussion, the early you have the money talk with children the quicker you demystify the concept of money and open up the communication channel for future discussions.
An easy way to get kids comfortable talking about money is to include them in on household budget talks and solicit their input from time-to-time. By letting kids get involved in household budget decisions you can teach kids:
· How you manage the household funds
· How financial decisions are made
· Their opinion is important when it comes to money
· They have the ability to make smart money decisions
Creating a safe space for kids to talk about money without being shunned will help them develop good money sense and build their confidence to not be afraid to have more difficult money discussions in the future.
6. Learn From the Mistakes of Others
It is always fun to share stories about your latest win investing in *insert current hot stock* or your latest hot stock tip, but you can teach just as much, if not more, from the mistakes you’ve made with your money — especially with kids.
“I’ve failed over and over and over again in my life. And that is why I succeed.”
— Michael Jordan
When you talk about your money mistakes with kids you create opportunities to teach them from your past experiences, show them how to avoid the same mistakes, and help them become more prepared for when similar situations arise in their lives. Talking about money mistakes also shows kids that making mistakes is part of the learning process and that they shouldn’t be afraid to act because of the fear of messing up.
Some topics you could talk about are:
1. A time (or times) having an emergency fund would’ve been helpful to have.
2. How planning for a rainy day could’ve saved you time, money, and a headache.
3. Why you should’ve saved money while you were younger rather than spending it all (explain how the time value of money works).
By using real examples from your life and talking open and candidly about money, you’ll show that it’s okay to make mistakes with money, as long as you’re learning from those mistakes, and that you can still be financially successful despite that.
7. Find Good Financial Role Models
The first, and most influential role models in a kid’s life are their parental figures. Whatever money principles you plan to inculcate in a child, make sure you’re not just “talking the talk” but also “walking the walk”.
The best way to teach your child how to be responsible with money is to first demonstrate the behavior, then explain what you’re doing, and finally tell them why you’re taking said action.
For example, if you go to the grocery store with a kid and you do a lot of impulse shopping, the kid will pick up on that behavior, assume that’s the norm, and will grow up to do the same. But, if that same kid sees you making a shopping list before each grocery trip, and you explain the reasoning behind it (i.e., avoid impulse shopping, only purchase what we need), they’ll have the knowledge and the example to make a wiser decision in the future.
It is much easier to form good habits than to break bad ones. By practicing what you preach, your child will see firsthand the results of sound money principles and have a positive role model to follow. Remember, children will follow what you do, not what you say, so make sure you’re practicing good money habits to reinforce the lessons you’re trying to teach.
8. Become Financially Independent
Do you remember when you were a child and you couldn’t wait to be older so you could “do whatever you want?”.
Well, that hasn’t changed for today’s kids either. Why wait until their 18 and out on their own to teach them how to handle money when you can start teaching them today under your supervision? While it may not be such a good idea to let your kid do whatever they want in all aspects of their lives, it is a good idea to let them develop a sense of financial independence at an early age.
The more freedom your child has in making financial decisions, the more confidence they’ll develop in their decision-making ability, and they’ll be able to learn valuable money lessons through their mistakes while the sum of money involved is still relatively low.
Ways you can help teach kids how to be financially independent are:
1. Create ways for kids to earn their own money and let them decide how to spend it -following a budget.
2. Don’t fund their lifestyle to the point that they’re dependent on you for all of their wants.
3. Teach impulse control, and that being a responsible person sometimes means you can’t also get what you want when you want it.
9. Generate Passive Income Through Investing
Teaching a kid how to invest at an early age exposes them to concepts such as creating passive income, having multiple revenue streams, and making their money work for them so they aren’t scared of investing in the market when they start making an income.
If your child has a favorite clothing or toy brand, consider purchasing shares of stock in the company. By helping the child invest in something that they already enjoy, you’ll be able to harass their natural excitement for the company and use it to teach them to valuable stock market lessons. Over time you can continue to build on these skills by teaching them how to track the company performance and make decisions on rather to continue investing in the company or begin to diversify their portfolio.
You can also teach kids about passive income through certificates of deposits (CDs). CDs are a low-risk way to teach children about the power of compound interest if they have money sitting in a checking or savings account.
10. Develop An Entrepreneurial Mindset
Kids are natural entrepreneurs. Remember back in elementary school when you would trade or sell lunch items, unique school supplies, or trading cards? Well, that was yours, and many other young children’s first introduction to entrepreneurship.
If you notice that a kid has an entrepreneurial spirit, nurture it by teaching them the skills necessary to become wealth creators. For example, if your kid wants to open up a lemonade stand, this is a perfect opportunity to teach them business lessons such as:
1. How to create a simple business plan that addresses the “who, what, when, where, why, and how” of the business.
2. How to pitch an idea to investors for funding and getting your business off the ground.
3. How to manage payroll such as staffing needs for your lemonade stand and how much you’re going to pay them.
4. How to create financial statements to track expenses, revenues, and profit.
5. How to generate a break-even analysis to determine how many cups of lemonade you need to sell in order to pay for your expenses (i.e., cups, lemons, sugar, pay back investors, payroll, etc.)
6. How to market and advertise their business to get customers to buy a nice cold glass of lemonade on a hot summer day.
As you can see, just from starting a simple lemonade stand you can teach a kid many business concepts such as accounting, inventory management, human resources, advertising/marketing, and sales that’ll serve them in whatever path they decide to take in life all while having fun and building wealth!
Conclusion
Teaching kids about money at a young age is the best way to ensure that they become financially responsible adults, to break cycles of generational poverty, and to preserve any generational wealth they’ll eventually inherit.
Unfortunately, financial literacy isn’t taught in school (yet!) so it’s up to each of us to make sure the next generation develops good money habits such as avoiding debt, creating a budget, and saving money to build a solid financial foundation.
What money lessons are you passing along to help create the next generation of wealth builders and close the wealth gap? Share your tips with the Black Wall Street community in the comments section.
