Nerdwallet's 2020 American Household Credit Card Debt Study revealed that, even though outstanding credit card debt balances dropped over the previous year, overall household debt was higher than ever before. Many financial experts believe that Americans' habits of spending more money than they make starts very early on.
The reality is that the earlier you start a child's financial education process, the better. While some parents don't think about teaching their children the value of saving before their first job, evidence suggests this may be too late for instilling healthy financial habits. Research from the University of Cambridge reveals, in fact, that a person's attitude about money is already set by the age of seven.
Parents Should Teach by Example
Kids start to mimic what they see their parents doing from a very early age. Whether it's what parents buy, how often they make purchases, whether or not they shop for deals and how often they say "no" to buying temptations, children are watching. Multiple financial experts have suggested that the number one money habit children pick up from their parents is spending. That's why it's important for parents to make sure they model the behaviors around money that they want their children to adopt. If you can establish good money practices early, it will be more difficult for them to be broken by temptation later on.
Unfortunately, some parents are having a hard time helping their kids to become financially literate. T. Rowe Price's 11th Annual Parents, Kids & Money Survey found that nearly half of parents said they missed opportunities to talk to their kids about money and finances. And a quarter said they are reluctant or extremely reluctant to discuss financial topics with their children. In contrast, the survey found that half of the children surveyed said they wished their parents had taught them more about money.
Tips for Instilling Good Money Habits Early
One of the best ways parents can help their children achieve a more stable future is to teach good money habits from a young age. By helping them understand the value of money, the value of saving and the importance of eventually achieving financial independence, parents can properly prepare their children to take on their finances in a proactive and responsible manner.
One of the most important concepts for children to grasp is that money isn't just for spending. They should be savings and, eventually, giving. Saving money isn't just about financial security, but it also teaches discipline and delayed gratification.
With younger children, it's easier to teach them to save for short-term goals as the concept of future stability is one they may not be ready to grasp. A good way to get kids in the habit of saving is by giving them a piggy bank or savings jar where they can deposit coins or cash. Keeping money in a clear container provides the added benefit of allowing kids to visibly watch their savings grow.
As kids age and are able to earn an allowance, they are better able to grasp the consequences of spending. Many parents believe it's important for their children to have some chores for which they are not paid so they understand the responsibilities of contributing to a household. But other chores may qualify for an allowance, so children can learn the value of earning money. Kids, just like adults, often feel differently about spending money they have to earn vs. money that is simply given to them.
Parents may also want to establish guidelines for their children, such that when they receive cash gifts for birthdays, etc., they automatically know it's okay to spend some of the money as long as they also save some of it. Keeping track of money spent and expected money to be earned additionally helps kids to understand where their money is going so that they become better at budgeting.
Once a child's savings grows past the limits of a piggy bank, its valuable to take your children to the bank to help them open their own savings account. Parents should encourage children to write down those items they are saving for, along with their estimated costs. This will help kids to prioritize purchases and have a better understanding of what it's like to live within their means.
After high school when teens start focusing on the future is a good time to begin building a good credit score and credit history. Applying for a credit card is a good start, as long as the child has enough discipline to pay off bills in time and not incur too much debt. Children at this age should also start to understand the value of giving money to those who are less fortunate. Again, such behavior is best established by following the example of parents.
Parents can help children identify charities that match their interests and passions. There are also a number of apps that are useful in handling donations.
While some high schools offer personal finance classes, it is ultimately the responsibility of parents to teach financial literacy to their children. It is never too early to start instilling the value of financial security and smart financial decisions. On the other hand, it is never too late to get started. So if you're worried that you missed the ideal age for teaching important financial lessons, simply focus on what can be learned at the present time. Your children's financial future depends on what you teach them today.