The 4 Lessons to Teach Your Children About Finances

Teaching children about money management can build a solid foundation for lifelong wealth creation. Unfortunately, these lessons are not universally practiced, even by many adults.

There are 4 financial lessons that I believe should be conveyed to children:

1) Money doesn’t appear out of thin air -At the basic level, money results from trading one’s time for money. Work equals money and you should explain to your children about your work and the monetary and emotional importance involved in it.

The topic of whether it is okay to give allowance to children is still debatable. Even more in dispute is whether they should be paid for doing chores. Personally, I believe a small allowance is good and some compensation for chores will not spoil the children.

2) How spending money works – How to spend money can be divided into phases of:       a) limited resource spending: the children can spend but not more than what they’ve earned. If items are too expensive, they will have to choose between one item or another, not both.
b) Value Spending – once the child advances in their understanding, they can be taught about smart spending, such as: spending more for better quality, the value of discount sales, buying and sharing  toys among siblings, etc’.
c) Needs and Wants Spending – Further give your children control over their money by setting a budget for certain shopping events(such as ‘back to school’). The role of the parent is to explain the difference between wants and needs and staying within the budget.
3) Saving Money – when the children want to spend more than what they have, a parent should teach them about setting financial goals and money saving tactics. As a more advanced approach, you can teach them about interest they can earn if they choose to save.
4) The Importance of Giving – Charitable giving should be explained, starting with the value of sharing things. This can be followed by telling them about worthy causes they might be willing to give to.

Utilize the natural curiosity of children, but never force the education on them.

Other, more advanced, lessons could include: passive vs. active income, investing, saving for college, credit and debt, and even retirement.

Since children learn more by observation than listening, do practice good money management tactics yourself and your child will grow a more informed person.