The Basics Of Financial Literacy
Financial irresponsibility runs as rampant as advertising. If you want your children to avoid the habit of reaching for the credit card whenever something glitters, the first two rules are:
- Set a good example in your own spending; and
- Make it the exception, not the rule, to buy on request.
That’s only the beginning, though. Any child old enough for an allowance is old enough to learn sensible budgeting. Teach them these key principles:
Identify your income. Typical kids’ income comprises allowance; payment for regular and odd jobs; and money gifts. Show your children how to track and plan for these over the course of each month or year.
Know your expenses. Few kids have to budget for utilities and taxes; few under high school age have clothing or auto expenses. But children of all ages like having regular funds for regular treats. The time to require them to use their own income, and make it clear that once that’s spent it’s gone, is as early as possible. Don’t be swayed into shelling out “advances” for “one little” candy bar; it may seem like the easy way to defuse tension, but once the habit takes root, you’re setting yourself up for a harder time when the kids’ taste advances to concert tickets and spa treatments.
Watch your spending. Experience is the most effective way of learning not to throw away money on impulse purchases; so don’t bother lecturing on the “sensible path” when kids blow their early allowances at the dollar store. They’ll realize soon enough that some things deserve better than post-binge dregs from yesterday’s allowance. Do take opportunities—outside shopping hours—to help them consider what they’d really like to have, and why, and how quickly they can accumulate funds for those things.
Save for emergencies and long-term expenses. By age eight at least, children should have savings accounts, and be personally making weekly or monthly deposits under parental supervision. At the beginning, show them how to count out funds for the deposit. Later, encourage them to commit to an amount they’d like to save, then hand them the full allowance and let them set aside the savings portion themselves. You may need a bit of early firmness when they want to spend everything “just this once” or to make impulse withdrawals, but soon they’ll develop the habit of having regular deposits ready on schedule.
Look for ways to increase income and decrease expenses. If your children still feel they don’t have enough money, encourage them to brainstorm ways to earn more. Don’t just hire them for your extra chores; they need to learn that most employers aren’t swayed toward leniency by family ties. Show grade-schoolers how to take the initiative of personally suggesting jobs they might take off neighbors’ hands. Older teenagers should be encouraged to make time for salaried jobs, with allowances kept low enough to provide incentive.
Still, even high-income adults commit thoughtless overspending. A $2 daily coffee doesn’t seem worth counting, until you consider that dailyadds up to over $700 a year, and the value of a car in ten years. Show kids how cutting small expenses leads to big rewards.
As does general financial literacy.