It’s quite evident that teaching kids about money as well as the importance and need for money, should be done as they observe their parents using it. One of the best methods to teach a child about money and the value of a dollar is to show them the different ways a dollar is used, and it’s a good idea to begin when they’re young. Many understand a lot more than you realize.
Not only should we be teaching kids about money, but more importantly, they need to understand that money is earned, and not simply given for whatever reason. Items that we need in every day life, whether they be a product or a service, are exchanged for money, with the value of the exchange determined by the seller or provider. The only way that a product or service can be purchased without money, is to exchange some other product or service for it, and this is known as bartering. This is not to common here in the USA, but in some parts of the world, it is more prevalent.
Teaching kids about money should include the importance of saving. They can take their allowance and spend it all on candy or some cheap toy, but then it is gone quickly. They need to be taught that by saving a certain part of their allowance, one day they will be able to buy a more expensive item such as a bicycle that will last much longer.
Have them establish a savings plan such as 10% of their allowance which will be much easier for them to calculate. Whatever amount that they earn can be calculated simply by moving the decimal point one space to the left. The savings account isn’t used for some short term item, but is used for the longer term items. Even though the amounts saved by the child now are very small, it will teach them the importance and value of self discipline. When teaching kids about money, such as saving for retirement, at an early age might not be a good idea because this may be a concept they can’t fully comprehend.
Teaching kids about money at an early age is good because by the time they get their first job, they will find it easier to continue with those principles. Another part of money management is to teach children about charitable giving, in order to make them a responsible member of society.
It used to be that you could take your child to the bank and open a savings account with around $10.00. In today’s economic environment, banks won’t generally open accounts with small balances, as their service charges will take it all rather quickly. Some banks service charge savings accounts until the balance reaches $1,000.00, but check around, you may find a credit union that is a lot more generous and responsive, and more receptive to teaching kids about money.
It used to be as well, that banks paid a decent rate of interest on savings accounts and you could show your child that as a benefit of saving, he/she would receive additional money. Now, with savings rates below 1%, there’s not much to see unless the account balance is substantial.
The next area of good money management when teaching kids about money, is the use of credit cards. This is one area where interest rates are not low, and in many cases, well over 20%. The child should be able to understand just how much a purchase would cost if it is not paid in full when the first statement arrives. It’s very easy to see those large monthly charges, and if the balance gets high enough, by simply paying the minimum payment called for, it will never get paid in full. Teach them this trap until they completely understand it.
In my opinion, credit cards should only be used as a convenience to purchase and then paid in full when the statement arrives. In my practice, I see young couples with seven to ten credit cards all maxed out to the tune of $50,000.00 plus, and they wonder why they have marital problems. Trying to keep up with their friends or neighbors with the over sized house, big SUVs, and all the latest toys, usually leads them to a divorce lawyer or a bankruptcy lawyer, sometimes both. I believe that teaching kids about money early on, will avoid some of these problems.
Most of the blame can be placed on the credit card issuers who mail out cards to anyone who is breathing, with little regard to their credit ability. Individuals see the amount of credit granted, and the temptation is too much. They begin spending on their wants and not their needs, and are soon in trouble. Teaching kids about money in a way that they will learn to exercise extreme caution with credit cards is critical. They need to learn to keep just one for the convenience of not having to carry large amounts of cash.