When it comes to advice on how to teach your kids about money, it’s hard to sort through the not-so-great stuff to get to the “oh, that’s helpful!” parts. It’s unfortunate because experts say that it’s important to broach the subject of money with kids at a young age, but studies show that parents are more comfortable discussing bullying, drugs and smoking than family finances or investing.
There’s no way to expect a child at any age to understand money unless you talk about it. So how do you start all of this things? There are the five most important financial conversations to have with your kids.
- People Earn Money at Their Jobs
Teaching children the importance of hard work is part of “no entitlement program.”
Best Approach: Discuss how you picked your career, and what you do at work–and then ask her what she might like to be when she’s older. Consider also paying your kid extra cash, beyond her allowance, for tasks that she accomplishes related to that career.
- You Need to Budget If You Want to Buy Things
A lot of parents forget to explain to their kids what they’re supposed to do with money once it’s earned. “When you’re a child, and you’re given a lump sum of money, if no one teaches you what to do with it, you’ll grow up thinking it’s all meant to be spent,”
Best Approach: Children as young as three can start receiving an allowance, and with that allowance comes the idea of budgeting and saving. Using four clear jars (the visual aspect is important for kids), and sitting down on allowance day with the jars to divvy up the money into 10% for charity, 30% for quick cash, 30% for savings to be used in the next couple of years and 30% for long-term savings.
- Giving Back Is Just as Important as Saving for Yourself
If your kid has allowance jars, he’ll know that part of his money has to go toward charity. Now you just need to pick the charity–and make it a habit.
Best Approach: Giving back is an important part of life, but the concept may take some getting used for small kids. “The easiest way to help your kid understand why it’s so important is to first involve him in ways that he can see how he’s making a difference, like helping at the food bank or sorting through clothes for the homeless,”. As gets older, search through Charity Navigator together to find an organization that interests him, and make donating to that organization a regular routine on allowance day or at the end of the month.
See also: Not Just Another Toy
- Good Financial Responsibility Means Managing Financial Tools Well (Investing)
Kids who start budgeting with cash from an allowance often find it hard to make the transition to checking and savings accounts, credit cards and the idea of investing. It’s your job to teach your kid how to use these financial vehicles responsibly.
Best Approach: You can introduce the concept of investing around the age of 10. “Start by finding stores and companies your kid loves, and purchase small amounts of individual stock for her, so she can watch it grow,”. As she gets older, explain the idea of finding companies and products that are recession-proof and why that’s so important when it comes to long-term investing.
- Everyone Has to Pay Taxes–Even You
Explain to your child that everyone has taxes taken out of their paychecks to keep things running smoothly in the country. Tell him that the salary he sets up for himself for his job–mowing the lawn, doing household chores–isn’t the same amount that he’ll be getting in his take-home pay.
Best Approach: Starting at age 10, put your kid in a 15% tax bracket and have him deduct that money from his allowance into the family tax jar. Of course, you’ll need to explain that, in real life, this money goes towards things like keeping our roads clean and safe, but at home, your family can vote on a quarterly basis how to use the tax money.
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