Teaching the Next Generation- Children and Finances by Ekaterina Angert
When it comes to top priorities in our lives, most of us would consider our children high on the list. We think about nourishing them, educating them, keeping them safe and healthy; but rarely do parents pay attention to the money lessons their children will surely need later in life.
What are the most important basic accounting skills children should learn, practice and master before leaving parent’s nest and starting on their own?
- Learn how to budget. Teaching them that can only be done by giving them money that they can learn how to manage. I (Kat) am personally against paying them for the chores, which should be done regardless. Another thing you might consider is an allowance or cash gifts for good grades, doing extra jobs around the house, or whatever you find fit. My personal method of splitting is this: 10% into savings, 10% -investment, 10%-give, and spend the rest 70%.
- Let them make mistakes. Most of their allowance is going into spending and they should spend regularly. They have to understand that money decisions are final. Let them make impulse buys, regret it later and learn from it. In the adult world this is called “opportunity cost.”
- Since children are rarely patient, you can teach them to split their “spending” budget into several categories.. something like spend now and short-term savings. It is not really savings per say, but more of a prolonged spending- and, what’s important- planned spending. An example would be saving for 2-3 weeks for a more expensive toy or book, or something else they find desirable.
- Surely you can start with simple things at an age of 3 and build up as they grow. Let them earn their own pocket money, and teach them how to budget. As they grow older, parents can continue to provide things like shelter, food, clothing, and education, but put the burden of nonessential expenses onto the kid’s shoulders. I bet that once they see all of their earnings going on the phone bill, or something else they can survive without, they will start treating those expenses differently. It is easy, when somebody else pays for you, but very different if you start doing it on your own and you see all of your money disappearing on something you could either live without or modify.
- Teach them the concept of “pay yourself first” or “cash flow” in accounting terms: they should know how much is coming in, and what must be paid. If there are some expenses that are due every 6 months (car insurance), pay 1/6 to your savings account every month, so that when the payment is due, it is ready and waiting. They can do the same for almost every item in their budget: birthday gifts -you know approximately how many people you need to spend on and how much. Add it up, divide by 12 and you got your monthly expense. So when, for example, $100 dollars comes in, they know that $10 is going into long-term savings, $10 is invested, $10 is donated and let’s say $20 of $70 is put into a separate place for later spending.
The goal in the long term is to raise an adult that is financially savvy, that can budget, stretch the budget, when in need, analyze and cut the expenses, and build a financial cushion. No matter how you choose to teach your children about money, let me reiterate that you should teach them something. You will be giving them a “hand up” instead of a “hand out.”