It’s never too early to teach your kids good personal finance and money management habits. Because financial literacy for kids typically isn’t taught in schools, it’s essential for kids to get the education and guidance they need at home.
Our Addition Financial members often ask us how to teach their kids good habits. Money management for teenagers is more complex – and should involve more responsibility – than money management for kids.
We asked some financial experts which money management habits they thought young adults should learn. Here are eight that we recommend.
#1: The Saving Habit
Without guidance, kids may be tempted to spend every cent they get, whether it’s from their allowance or a gift from grandma. Teaching them to save money at an early age will turn saving into a habit. Bryce Welker, the CEO of CPA Exam Guy, told us this:
“Kids and teenagers should learn to put aside a portion of whatever money they earn or are given and to keep it as an emergency fund. Life happens fast and liquidity is important in a jam.”
You may not want to talk to your five-year-old about emergencies, but you can talk to them about financial responsibility and saving up for something they want. Electronics are something most kids want and parents can teach them to treat expensive items with care by requiring their children to pay for part of the cost out of their allowance money.
#2: The 50/30/20 Rule
Our next money management habit for kids comes from Christopher Liew, CFA, the Creator of Wealth Awesome. He told us that kids should learn a fundamental money rule that’s useful for adults, too.
“Learn the 50/30/20 rule: Have 50% of your money for needs, 30% for wants, and at least 20% for savings. Develop good saving and spending habits. Teach them about spending on things that will increase [their] quality of life, and to avoid excessive consumerism.”
We like the way Christopher ties the 50/30/20 rule to spending habits and smart buying habits. Kids tend to be impulsive buyers and their still-developing brains may be more inclined to spend to fulfill short-term wants rather than long-term needs. There’s nothing wrong with buying something fun, but it’s a good lesson to show kids that quality items last longer than cheap ones.
#3: Comparison Shopping
Our last personal finance habit leads right into this one, which comes from Krista Fancher. She’s the Associate Director of Innovation Diploma at The Mount Vernon School and has some smart ideas about how to teach kids about money. She told us this:
“The easiest way to facilitate this budgetary understanding at home is with trust. As a parent, decide how much you want to spend on something your child wants. Give them the money and tell them that they can keep what they don’t spend or use it to buy something else. It is incredible how quickly children change their tune from wanting the ‘best’ to wanting something that costs a little less.”
Krista provided us with a real-world example of how trusting kids with money can teach them to plan and budget.
“Early last year, we traveled to Africa with a group of students in 10th - 12th grade who were entirely responsible for the group’s money. If they had run out of money with three days to go, it would have been a long three days with nothing to do. They had meetings each night to collaborate and plan how to divide up all the money. Mistakes were made, but working together, the students adjusted and handled their finances just right.”
This is a lesson you can teach your kids at home by putting them in charge of dinner planning once a week.
#4: Creating a Budget
Several of our financial experts mentioned a basic money management skill that’s near and dear to our hearts. We’re talking about budgeting. Here’s what they had to say.
Karen Condor, a Personal Finance Expert at USInsuranceAgents.com, told us:
“Money habits kids and teenagers should learn from an early age revolve around opening a savings account and creating a budget to help them spend responsibly in order to save for their short-term and long-term goals.”
We got a similar suggestion from Max Kimmel, the Owner of One Shot Finance. He talked about budgeting as a way of providing kids with regular income.
“Kids should receive an allowance of some sort so they know what it's like to have an income and be forced to budget. If you don't give an allowance, or buy your child things for them whenever they want, they'll never learn how important saving money is until it's too late.”
As your child’s parent, it’s your responsibility to provide for their needs. What can be challenging is holding the boundary when your child wants something. Providing them with an allowance and letting them know that they need to make it last until their next payment is a practical way to teach them that money doesn’t grow on trees!
#5: How Credit Works
You probably won’t want to give a credit card to your child who’s in elementary school, but starting in middle school, it’s a good idea to start teaching kids about credit and how it works. Mason Miranda is a Credit Industry Specialist at Credit Card Insider. He offered us a list of credit-related lessons for kids and teenagers. Here are some highlights.
- Start building credit as early as you can so that you have a good base. Once you hit college and beyond, you won’t have as much trouble qualifying for loans as your peers do.
- Pay off the full statement balance on your credit card each month to get the most out of the rewards program and avoid interest.
- Credit cards are NOT free money. If you can’t afford to make a purchase with what’s in the bank now, you probably shouldn’t put it on a credit card.
- On-time monthly payments on all debts are key for improving your credit and setting your financial future up for success.
- Your credit history, credit report, and credit score are very important. They can open doors to opportunities you wouldn’t have otherwise, including better rewards programs, lower interest rates and better business loans.
We recommend teaching teens how credit scores are calculated before trusting them with a credit card. Addition Financial’s Vibrant Savings and Checking Account comes with both a debit card and a secured credit card with a $500 limit. It’s a great tool to teach your teen about credit.
#6: Money and Self-Esteem
Our next tip comes from Dr. Fran Walfish, Beverly Hills child, family and relationship psychotherapist, author, The Self-Aware Parent, regular expert child psychologist on The Doctors, CBS TV and co-star on WE tv. She shared some insight from treating her patients.
“Don't carry your savings with you to school. Many of my school-age patients have 'secretly' taken their savings ($60-$300) to school in their pockets or backpacks. It gets lost, stolen, or bartered and traded for a toy or rare sports card.”
She also shared a technique to teach kids about why they shouldn’t link their self-esteem to money or material things. She said:
“Create open honest dialogue about how self-esteem is established and built. It doesn't come from the money or things we have, nor does it come from showing off about our possessions. Self-esteem is rooted in the way we feel about ourselves. The best way to feel good about oneself is by the way we treat other people with kindness and generosity. When we give of ourselves we are the beneficiaries.”
We love this advice because it goes hand in hand with teaching kids to be responsible with money. They need to understand its value but they also need to know that it isn’t everything.
#7: Investing
We got a second tip from Bryce Welker. He told us this:
“[Kids] should also learn that it is better to have one's money working for them than the other way around. Learning to identify investment opportunities, whether that be lending or investing, is an important part of financial security later in life.”
Even young kids can use an app like Acorns to make investments. Older kids can learn about compound interest and retirement planning. Teaching them about investments at a young age is a good way to help your children have a secure financial future.
#8: How to Protect Their Money
The final tip we have for money management for teens and kids is to teach them not to be vulnerable to scammers. It’s a sad truth that there are plenty of people in the world who are happy to take advantage of people of any age, even young children.
You want your kids to be good at managing money. One way to minimize the risks is to talk to them about common financial scams such as phishing and that it’s always a good idea to bring some skepticism to any situation where someone is asking for money or information related to money. This blog post with online banking safety tips can give you a framework for teaching kids how to protect their money.
The eight habits for personal finance for kids and money management for teenagers that we’ve listed here should provide a solid foundation for your child to learn about money management, credit and more.
Addition Financial has accounts designed especially for kids and teens. Click here to learn more!
Posted on May 19, 2021
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