Editor's note: This article originally ran on Fivecentnickel.com. It has been reprinted here with permission.
The Consumer Financial Protection Bureau estimated in 2013 that outstanding student loans have swelled to over $1.2 trillion. Seven in ten college seniors who graduated in 2012 had student loan debt, at an average of $29,400. Scary! It is extremely important for kids to have a good handle on personal finance before they enter college. Personal finance is now becoming a part of the K-12 curriculum in many school districts, but the best education can only come from parents and habits developed at home. So how can we raise money-smart kids?
How do you teach your kids about money?
- Educate yourself: You can’t teach something you don’t know yourself. If you are not great with money, it is time you changed for the sake of your kids. Learn as much as possible about budgeting, getting out of debt, saving and investing. Once you have a good grip on your own finances, you can be an example.
- Teach them by example and be honest: What you say doesn’t matter, kids learn by observing what we do. You have to practice what you preach. Lead by example. Be open about your financial decisions. Do not make them feel they have access to unlimited amounts of money. If you do not have money to get something they want, have an honest conversation. Kids understand more than we give them credit for.
- Teach them the principles, not just the techniques: It is easy to get bogged down by the minutiae of personal finance. Cultivate good spending habits: Teach them to set goals, prioritize and encourage them to share. Techniques to implement things will always change, but good principles will stay with them for life.
- Teach them to take responsibility: Personal responsibility has the highest impact on one’s finances. Instead of feeling entitled and blaming others, we need to accept the fact that no one cares more about our money than we do. This will automatically lead us to find ways to get out of debt and save for our future.
- Teach them to give: This is something I want to teach my kids, but don’t yet have any good ways to teach them. Right now my idea is to take them volunteering with me to help them see what a difference a small act of kindness can make in someone else’s life. If you have any ideas on how to encourage kids to give, I would love to hear from you.
- Help them earn money early on: In an interview with NBC, Warren Buffett quoted a study that tried to find predictors for business success later in life. Turns out the age you start your first business impacts how successful you are later in life. Case in point — Buffett started his first business when he was 6. You can help your kids succeed by helping them start their first business. Set up a lemonade stand or throw a garage sale and make it kid centric — let them help set up, choose what to sell, value the goods, sell, and do the books at the end of it. Make them realize that earning more money will get them closer to their goals. When kids learn how to make their own money, they will also learn the value of money; how to be careful with what they earned and how investing money will help them make more money.
- Talk to them about consumerism, impulse-buying and advertisements: Most of us don’t realize how much advertisements affect us. Ads are created based on years of research into human psychology and are created with one goal — to make us buy what the advertiser wants us to buy. We might think we are rational beings, but we are not. It is better to accept that we are vulnerable and do something about it. Talk to your kids about consumerism, clutter and impulse-buying; then teach them to have a “cool-off” period before they buy anything big.
- Teach them to distinguish between a want and a need: If they demand something, is it really a need or a want? For the most part, parents buy what a kid needs, so it is probably a want. Encourage them to evaluate their purchases in this way. If it is a want, is it an impulse buy? Can they wait for 30 days to get it?
- Let them have control of some money: Let them budget their money, pay bills, save for their needs and wants. Sit with them and draw up a budget. Keep it simple so that they don’t associate budgets with something that is hard and unpleasant.
There are plenty of resources to help parents teach their kids about money. Here are some that I found extremely useful and interesting:
- H.I.P. Pocket Change
- Practical Money Skills Games
- The Mint
- Choose to Save
- Secret Millionaire Club (Entrepreneurship)
- Fraud Scene Investigator