7 things kids really need to know about money
1. The concept of money
Parents should teach children that money is a helpful tool that makes it easier to get what we need and want, now and later. “Parents can start teaching children about money through play. Allowing children to role-play scenarios where they pretend to purchase something is a wonderful way of letting them learn about the value of money, how much things cost, how money works and the importance of counting. There are a number of toys on the market that help introduce small children to money, such as LeapFrog’s Count Along Register for ages two years and older. Kids learn quickly, so it’s never too early to introduce them to how money works,” says Chiquita Patrizi, spokesperson for Prima Toys.
2. The value of working for money
It is important that kids learn from a young age that money doesn't magically appear it must be earned. Discuss the importance of working for money and then give kids appropriate paid jobs in addition to expected household duties. As they get a little older, encourage them to make money outside the home by caring for the neighbour’s pets or washing cars.
3. The importance of saving and sharing
If kids have money, they're likely going to want to spend it; they need to be taught by the time they reach school that it's not OK to spend all of their money at once. Since spending money comes naturally, they also need to learn about saving and sharing.
You can help them learn this by teaching them the 20-10-70 rule:
Save 20% - this will teach them to always pay themselves first.
Give 10% - this teaches them the value of sharing and giving to others who are less fortunate or to causes they care about.
Spend 70% - this teaches them to spend less than they earn, which is the cornerstone of personal finance.
4. The difference between needs and wants
Teens have a hard time distinguishing true needs from actual wants. For example, clothes are a need, but brand names are a want, food is a need, but fast food or pizza is a want. To help teens learn the difference between the two let them do their own clothes shopping. Determine a shopping budget and create of list of items they need to buy. Give them a gift card that can be used in any store at the mall and let them make the difficult decisions when it comes to limited resources and unlimited options.
5. How credit works
Just as your kids notice you're using money to buy things, they're also likely noticing that you're paying with plastic. Parent scan tell kids that whenever they use a credit card or get a loan, the bank is providing money for the purchase; the bank will send a bill showing how much you owe. If you don't pay all of it, you will have to pay interest on the remaining balance. That interest can add up over time, so you end up paying more than the actual cost of the item you bought. They should also be taught to spend only what they can afford to pay off each month so they don't end up in debt and don't harm their credit score.
6. The benefits of investing
Between the ages of 8 and 12, parents can introduce the concept of investing to their children. It's important to teach them the money you make can make even more money, if you invest it wisely. Parents should explain that it requires taking a risk, with the expectation of achieving are turn. It's important to discuss how much risk you should be willing to take when investing. Explain that money invested can grow over time thanks to compound interest, which means that interest is paid on the amount invested plus the interest that grows on that investment. The earlier you start investing, the more time you give your money to grow and the more you'll have. Parents and children can open an investment account together using some of the kids' money.
7. The concept of net worth
When your kids are teenagers, you can start to explain the notion of net worth. In a nutshell, it's the difference between total assets - what is owned, and liabilities - what is owed. Kids need to understand net worth because it's a truer measure of financial health. For example, you could earn a lot of money. But if you also owed a lot of money, you could have a negative net worth. In other words, you wouldn't have financial freedom.