Having your children be knowledgeable about finances is an important skill in life. It’s part of setting them up to be able to excel once they go out on their own. We sometimes hear people say “I wish I had learned about this in school” when it comes to finances. It is often up to the parent to teach and guide their children to become financially savvy individuals. 

What better time than the new year to start teaching your kids about finance. We will go over in this article 3 ways you can teach your kids about finances in 2022.

Discussing Specific Financial Concepts

It all starts with education. Sometimes parents consider it almost taboo to discuss finances with kids. While it’s true that you don’t have to discuss every sensitive financial topic with your kids, teaching them basic concepts about finances early on will only serve them well later in life. Below are a few topics that are good to teach your kids. 

Wants vs. Needs

An important concept to teach a child is what is a want versus what is a need. Needs are essential things to our everyday lives such as food, clothing, shelter, and healthcare while wants are things like candy, movie tickets, or a trip to the theme park. You can still go on about your everyday life without fulfilling a want, while not fulfilling a need can cause difficulties. 

Learning the concept of wants vs. needs can help your kids learn how to prioritize what’s really important and what’s not.

Credit Cards and Loans

Teaching your children about credit cards and loans is a great way to prepare them for responsibility utilizing these products when they grow older.  When discussing credit cards, it’s good to let your child know the importance of paying it off monthly, and the high interest rates credit cards usually charge. It is also useful to go over the dangers of not paying off credit cards and how much extra money you would pay in interest if you accrue a balance.

Loans are also an important concept to discuss with your child. Helping your children understand interest rates and how a loan amortization works can help them make an informed decision in the future if they need to take out a student loan or get a mortgage for buying a home. 

Create a Budget Together

Creating a simple budget together with your kid can help them set a financial goal and then be able to track progress towards that goal. For example, they can have an estimated monthly income from their allowance and then estimated monthly expenses from buying things such as  candies or toys. If there is excess cash flow every month, perhaps you can discuss with your kid whether to save it or even invest it. 

Setting a Good Example 

While it’s important to teach your child about concepts of finance, setting a good example can help your child mimic your good financial habits.

There are also times where you can openly discuss your money decisions with your kids. For example, there can be a situation where you discuss with your child how you are prioritizing the needs of the family first before moving to personal wants. You can also discuss how you’re spending on want because you’ve saved up for it, or alternatively how you’ve decided not to purchase a want because you feel it is better to save the money instead. 

Small things like this will inadvertently help your child build good financial habits as they make their own financial decisions in the future. 

Letting your Kids Take Action

Learning by doing can be a great way to teach your kids about money. It will help your child conceptualize different aspects of finances and further ingrain what you discuss with them in their mind. Below are three actions you can take to take your child about money. 

Let them Earn Money

Letting your kid earn money is a great learning experience. They can appreciate the fact that money is not free, and is something that has to be worked for. Setting up a lemonade stand or doing chores for an allowance are great ways to introduce your kids to the concept of earning money. It will let them appreciate the value of their hard work, and hopefully, make them more prudent and careful when they decide how to manage their money since they now know it has to be earned.   

Let them Save Money

Having a savings jar or a piggy bank will help your kid visualize the process of saving. Having your child save towards a goal will motivate them and let them visually track their progress. For example, if you set a goal of buying a $20 toy, your kid can visually see how she is slowly saving up to this amount.  

Let them Invest in the Stock Market

The earlier you start investing the greater the effect of compounding, so it’s never too early to start teaching your kids about investments. The S&P500 has averaged long-term returns of 10.5% since 1957. If your child invests $500 today in the stock market in 20 years it will be $3,683 using the average return of 10.5%. 

A good way to introduce the stock market to your child can be using companies they recognize. For example, if your child is at the age where they already recognize certain brands such as Apple, Nike, or Blizzard it can be a great lead-in teaching them about the stock market. Teaching your kids about various types of stocks (i.e dividend stocks, growth stocks, and value stocks) can also help them learn about how to allocate their stock portfolio. If you’re looking for other investment ideas such as farmland, you can also check out this list.

Perhaps the best way to learn about investing is to have your children invest themselves. There are lots of simulation apps or programs out there that you can give your child to learn how to buy and sell from the stock market. You can also open a brokerage account for your child and have them manage actual money if you feel they are ready for it. If you’re still trying to decide which stockbroker to sign up with, you can see this article for a comparison of Etrade and Robinhood.

Conclusion

In this day and age, it is imperative that parents teach their children about finances. 3 ways to teach your kids about finances are discussing specific financial concepts, setting a good example, and letting your kids take action. Helping your kids become savvy about finance will give them a leg up in their long journey ahead!