Kids who are smart with money grow up to be adults who are smart with money. Also, because they’ve learned how to save their allowance, they’re less likely to hit you up for cash. While the key to raising financially savvy kids starts by teaching them young, unfortunately, financial literacy isn’t a high priority in American schools these days ⏤ which means the onus of teaching a kid personal finance and how to handle their Benjamins falls much more heavily on parents.
So how do you raise a child who understands the value of a dollar, enjoys saving, and understands the importance of living within their meager 8-year-old means? In addition to talking to them often about money (it shouldn’t be a taboo subject), you can reward them for saving, teach the value of bargain shopping, and set a good example with your own personal finances, so they can use it to model their spending and saving habits. It’s also important to let kids make their own financial decisions so that they fully understand that if you spend on this, you won’t have money for that.
Still, it takes more than giving them a piggy bank and showing them how to fill it. “When it comes to teaching kids about money, there are all kinds of things like allowance and saving and budgeting and investing,” says Jayne Pearl, a financial expert and author of Kids and Money: Giving Them the Savvy to Succeed Financially, “And those are all really important. But they are outgrowths of five financial values that I’ve identified and every child should learn.” Fatherly recently spoke to Pearl to learn exactly what those five values are and what parents should be teaching their kids about money now, so they’re not still living at home when their 30.
The Importance of Delayed Gratification
Teaching the long lost art of delayed gratification to kids is critical, says Pearl, who notes that the benefits of being able to wait for rewards extend well beyond a person’s financial well being. Studies have repeatedly shown that the ability to delay gratification predicts success in many areas, including academics, business, and sports ⏤ not to mention whether a teen is more likely to dabble in at-risk behavior.
One way she suggests helping kids learn to wait for the good stuff is to help kids create a savings plans for things they want and then incentivize it. “Create a 401k-like matching program where you match what your kids put in a savings account or piggy bank,” Pearl says. “And if they decide to withdraw money to buy something on a whim, you stop matching their saving until they replace what they withdrew.”
The idea is to teach your kids to want to save, not be forced to save, she says. “If you force kids to save, they might do it until they leave home, and then they may just click their heels and say ‘yay, I don’t have to save anymore.'”
How to Understand the Difference Between Wants and Needs
“We all want things, and that’s perfectly normal and okay,” Pearl says, “But it’s really important to know the difference between wants and needs.” And teaching that lesson starts by providing them an allowance ⏤ “based on financial responsibilities, not grades, age, behaviors” ⏤ so that they have actual money to practice managing. She suggests the allowance should be enough to cover “non discretionary items (needs) you already buy them, such as toiletries, clothes, school fees, sports or musical items such as soccer socks, guitar picks and strings and discretionary items (wants) such as music downloads/CDs, games, toys ⏤ plus a bit for saving and charitable giving.
From there, it’s important to discuss with them what’s an actual need and what’s simply a want. And one way she suggests doing that is with a fun ‘gotcha’ game she played with her kids. “If my son heard me say I need to get a new pair of sneakers,” Pearl says, “You say, oh really, you already have three pairs of sneakers. Why do you need another pair? And then I had to put a quarter in the ‘gotcha’ jar. Eventually, we would either donate the money from the ‘gotcha’ jar or use it to buy a little treat.” Either way, it keeps kids perpetually thinking about the differences between wants and needs in relation to the products they see on TV or in stores.
How to Make Tradeoffs
Once kids understand the difference between an item they absolutely need and one they just want, you can begin to help them learn how to make tradeoffs, Pearl says. Research costs, explain why one product costs more than another, and depending on their age, help them set up a budget. The important thing not only to help them prioritize savings versus spending but also which items they would rather buy and why. “So you can have this or that, you know, but you can’t have everything.”
How to Tell Yourself ‘No’ to Buying Things
This value is decidedly easier to teach once a child learns to prioritize and make tradeoffs, but it’s critical that kids learn to self-regulate when it comes to spending. “When parents say ‘yes’ too much, they risk indulging their kids and creating a sense of entitlement and dependence,” Pearl says. “However, when parents say ‘no’ too much, they may feel a little guilty, as if they are depriving their kids. It’s a no-win for parents.” The better strategy, she says, is to put more financial choices in the hands of the child through the allowance, and teach them to say ‘no’ to themselves, so that you don’t have to.
Why They Should Be Skeptical of Advertising
Finally, it’s crucial to teach kids to “develop a healthy skepticism of the media, of commercials, of their friends, the peer pressure, all of it,” Pearl says. The best way to do this, she suggests, is simply to watch TV with your kids and “point out commercials with fast-talking announcers or small print on the screen and highlight techniques that make items look larger or better quality than they are.” As a parent you want them to know that every ad is an attempt to take money out of their pocket. And while the item being advertised may be something they need or want, it’s always important to evaluate what it is and how it’s being portrayed.
In addition, another good way to get through to kids about the power of negative advertising is to point out mistakes and disappointments with your own purchases and the lessons you learned from those experiences. “Tell them how you got sucked in when you saw this thing advertised on the internet and you just couldn’t resist and you bought it and it broke,” Pearl says. “Share your own mistakes, kids love that.”