How to Teach Your Kids Financial Responsibility
Teaching kids financial responsibility is becoming a growing concern among parents around the globe. While it might sound like an obvious thing to teach kids, most of us were never taught this.
Millennials, those born between the early 1980s and mid-1990s, are the generation with the fastest-growing debt load. According to an Experian report, the average millennial had about $27k in non-Mortgage debt in 2020.
This increasing trend among the younger generations of incurring debt is the byproduct of aggressive marketing and lack of financial education. Now, experts around the world are wondering how we can educate the next generation.
Teaching young children and adolescents financial responsibility is a great way to prepare them for the future. Failing to teach such a skill in our modern times is just delaying the inevitable as life eventually will. And life is not a patient teacher.
However, kids are not especially good at understanding the abstraction of money, which can make the process challenging. However, teaching them a learn-by-doing approach is sure to help them understand it. The good thing is that doing so is now easier than ever before.
Why Money Can be a Hard Concept for Kids
If you are reading this article, chances are you have been in this situation: You go to a store with your kids to buy groceries, lose them from sight for just a second, and then disaster strikes: You see they are holding a toy as if it was some precious gem.
Trying to explain to a kid that wants you to buy something for them is one of the most difficult tasks there are for a parent. Not necessarily because your kid will not take a no for an answer but due to incessant questions that will come.
However, if you put yourself in the shoes of your kid, it is not hard to see why. They go with you to a store where you select products, walk to a cashier, and swipe a card. Just like that, the items are yours.
With the increasing use of cashless solutions to pay for products and services, kids are getting less used to seeing cash. And even when they do, its level of abstraction makes it hard for them to understand.
Money is neutral and intangible in the life of a kid. They see and interact with the toys, get food from the fridge, and wear the clothes they buy. However, they have no way to know the real cost associated with them.
For this reason, it is becoming more common for parents to give allowance to their kids at a younger age. However, this allows them to get used to handling money but not financial services.
Financial institutions have found in new generations a great group to generate gains in the form of credit. The problem for adolescents, young adults, and even some adults, then becomes the same as when they were kids: money is intangible again.
The only way for kids and adolescents alike to gain financial responsibility is through experience. Fortunately, there are many ways in which you can allow them to have it!
Teaching Your Kids Financial Responsibility
As we said, financial responsibility is better learned via experience. Many adults have learned this the hard way once they incur too much debt or are forced to do so.
Giving an allowance to your kids is a good way to allow them to understand how money can be used. However, by doing so you won’t be teaching them all the aspects there are to it. Some of these aspects are responsible use, how money is earned, investment, savings, and much more.
Let’s talk about some of the things you can do to teach your kids financial responsibility!
Start at a Young Age
As we previously mentioned, cash is getting rarer by the day as we transition to a cashless economy.
For this reason, it is important to teach kids at a young age what cash is. This will not only help them realize that there is a “physical” aspect to money but also facilitate the explanation of credit and debit cards.
When you go shopping with your kids, make sure to show them how the transaction is taking place. Showing them the receipt and explaining the amount paid is also a great way for them to start thinking about the concept of money.
You should not expect your 4-year-old to understand what money is. However, you can expect them to pay attention and understand that there is more to it than swiping a card.
Teach Them to Budget
Budgeting is a way to understand the concepts of saving money and financial planning. Teaching this skill to a kid is a great way to ensure they will act responsibly when it comes to their finances.
Providing your kids with the responsibility to buy some items for themselves will allow them to learn how to budget. Now your kid has reason to plan how they will save money while buying what they are responsible for.
As long as you supervise and follow them through the process, they are sure to succeed!
Show Them Why it is Important to Save
No kid likes being denied something they really want, and most of us hate denying it to them. However, you can take advantage of such situations to teach your kids financial responsibility through saving.
If there is a toy or game they really want to get, advise them to save part of their allowance to acquire it later on. Delayed gratification is one of the most useful skills as you grow up. You can even provide them with the chance to make some extra money by doing small chores.
Give Them the Chance to Earn Money
Providing your kids with an opportunity to gain experience is the best way to teach your kids financial responsibility. However, by handing out money for no reason, they won’t understand a valuable lesson: The actual value of money.
By giving them chances to earn money, you will teach them that money doesn’t grow on trees. An allowance is a great way to do it as long as you are requiring them to earn it. While the conditions are up to you, make sure they are fair but require some effort.
Let Them Negotiate Their Allowance
It is not uncommon for kids, and adults for that matter, to need more money as they grow older. By allowing your kids to periodically negotiate their allowance, you will be teaching them the direct relationship between working and earning money.
As your kids grow older, chores should get easier for them. By allowing them to change or increase their chores, they can also increase their allowance while gaining a new level of introspection when it comes to money.
Teach Them How to Invest
Delayed gratification is one of the most important factors to consider when teaching your kids financial responsibility. This is not only limited to saving but also helps with investing money.
Investing requires patience, discipline, and research. If you have investing knowledge, you can guide them through the process. If not, offering the chance to “invest” their money by letting you keep their savings is a great way to start.
Teaching them about the concepts of “risk vs reward” will further increase their knowledge about financial responsibility. It will also allow them to get more familiar with other financial concepts as they grow up.
Use Technology to Facilitate the Process
Teaching kids financial responsibility is a growing concern among parents. This has created a fertile ground for financial applications designed for this purpose to emerge.
Services like Greenlight have created features specifically designed to teach essential financial concepts via experiential learning. In fact, some of the tips we have offered in this article are offered by the Greenlight App and Debit Card.
With Greenlight, you can set allowance on autopilot, reward completion of chores, get real-time notifications on the use of your kids funds, and add funds instantly if needed. You can also allow your kids to invest part of their balance after you have approved each transaction.
If you are not interested in using a service like Greenlight, you can still make use of technology. Creating a spreadsheet or other digital registry of all “transactions” between you and your kids, as well as their expenses, is a great way to increase your kids’ financial awareness.
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