Parents look to raise their children to become responsible adults and capable of making prudent decisions throughout their lives. But for many children, lessons in money management and financial literacy fall by the wayside. This is unfortunate, because as adults they will need these skills to make important decisions about money and finances.
If children don’t learn these values by the time they strike out on their own, it’s likely they’ll become lifelong dependents, sponging off of Mom and Dad until their parents’ money is depleted or their financial future is in jeopardy.
Parents are often in the best position to teach money management skills and financial literacy to children—they are often a child’s first and longest-lasting teachers. Children also tend to follow the lead of their parents, who can instill important lessons and values in the earliest years through teaching by example. But parents often are not very skilled in money management themselves. Many lack basic understanding of financial concepts and come to their roles as family teachers with poor financial literacy.
Parents can do right by their children by improving their own financial literacy and making prudent decisions with their money as a way of teaching by example. They can also be more deliberate in the teaching financial lessons throughout their children’s young lives and invest in their financial education.
Let’s look at ways parents can teach money management skills at different stages of their children’s lives and help them become more financially literate as adults.
The childhood years
Parents provide for nearly everything when children are young. So kids may not understand where money comes from. Or, they may get the sense their parents have an endless supply of funds to buy things.
The idea that people work for money may be novel to most children. So lessons about money often start with chores. Kids can learn that by doing work they can earn money, then they can use that money to purchase whatever they wish. It’s important to establish this connection between work and money and sow the seeds for a strong work ethic early in life. Plus, children need to understand that money is not an infinite resource—everyone has to do some work of value in order to be paid for it.
Children should also learn the value of saving the money they earn. It’s no surprise that many children are impulsive with money and want to spend the cash as soon as it’s in their hands. They should see that impulsive spending is not the point of earning money.
Parents can help children learn to control these impulses and plan ahead for purchases. They can stress the value of saving money to buy something the child may truly value, rather than spending it recklessly on items they may want at the time but not necessarily value over the long term.
The teenage years
Kids get more expensive as they get older—all parents who have survived the teenage years can testify to that. Clothes and toys come with bigger price tags. Sports and other extracurricular activities require more money. And when teenagers begin to drive, the cost of car insurance premiums can put a dent in many household budgets.
Plus, many teenagers are also making preparations for college and other paths to careers beyond high school. Those plans come with costs as well, including tuition, transportation and a host of other living expenses that add up quickly.
So teenagers have their fair share of reasons to save. Hopefully the lessons they learned as younger children have been well established and they are able to put them into practice.
Adolescents also have more opportunities to work and earn money. Their increased earnings potential can make the incentive to save more powerful. Moreover, for teenagers working their first real jobs, those initial pay stubs show them how taxes affect their income—another chance for parents to teach children an important lesson that can carry on into their careers.
Finally, many college students also get their first lessons in borrowing at this age. Applying for education loans is common for students these days. Parents can help their children navigate the complexities of the loan application process, understand the burden of debt and the impact of interest rates, and ultimately set up a plan to start paying off those loans as quickly as possible after graduation.
The young adult years
Children eventually grow up and (hopefully!) move out of the family home, eager to embark on their own lives. That does not mean their financial education comes to an end. Parents should continue to share lessons on finance and money management to help adult children learn advanced skills and turn the knowledge they have already accumulated into lifelong habits.
Many young adults get in trouble early in their independent lives by overspending and living beyond their means. They’re often excited about starting a full-time job and earning a 40-hour-per-week paycheck for the first time. The combination of more money and greater latitude to buy whatever they want is thrilling, but can also wreak financial havoc.
At this point in life, it’s easy for young adults to dig a hole of debt that can take years to recover from. Before assuming any kind of debt or taking out a loan, young adults should calculate how much they can really afford to borrow, what monthly payment they can actually afford, and how long it will take to pay their loans off completely.
A household budget is an essential tool for young adults living on their own for the first time. A budget should be used as a financial guide to help prevent overspending and living beyond their means. But many may not know how to create one or even where to start. Parents can share their own household budgets to help their adult children see all of the costs that should be considered. They can also find sample budgets and templates online that make it easier to plan for monthly expenses and manage household expenses.
Saving lessons become saving habits.
Pulling in a full-time salary shouldn’t be all about spending. In fact, the first consideration should be about saving. Young adults should prioritize building an emergency or rainy day fund. This is money that should be used to pay for large, unexpected bills, such as car repairs or medical costs not covered by insurance.
This account should also be used to pay for living expenses in the event of losing a job or other source of income. An ideal rainy day fund would include enough money to cover at least 6 months of living expenses.
Once the emergency fund is sufficiently established, savings plans can turn toward retirement. That may seem too far off in the future for young adults to worry about. But the reason to start saving so early is to take advantage of time.
A lesson in the power of compounding will help young adults see the value in saving early. Then, learning the ins and outs of workplace retirement plans like 401(k)s can help them take advantage of these benefits and make saving for the future automatic and effortless.
Financial literacy is a long-term investment
Like any long-term investment, the ultimate reward from teaching your children financial literacy will come down the road. By showing children the value of money and instilling the basics of a financial education in the earliest ages, parents can help their children be skilled enough to make smart financial decisions as adults and be able to plan for their own future financial security.