If you think about what it takes to raise a "financially savvy" child, it might seem that family wealth has to be part of the picture. But when you consider the connection between "financial responsibility" and "financial security," you'll see a trust fund isn't the only way to set a young person on the path to financial independence.
Parents' dreams for their children often are woven into long-term financial plans. They save for college and protect against risk to ensure their goals can be met. They have disability insurance to provide income if they become unable to work, and life insurance to build cash value and take care of the family's needs if the worst should happen.
It's good for parents to plan ahead, but it's just as important for their children to be financially knowledgeable and ready for the day they will manage on their own. The more that can be done – early and often – to help children understand financial matters, the more likely they are to develop positive habits. Much like the old adage about teaching a man to fish, imparting financial responsibility provides knowledge and skills that last a lifetime. Here are some tangible things that parents, teachers and friends can do to set the stage for a financially secure life:
- Dream On
Encourage children to dream and set goals, and then help them establish a habit of savings to achieve them. Whether it's in a piggy bank or savings account, collecting funds for a new toy or a new car, they will learn how long it can take to accumulate cash and the importance of conserving so the account can grow.
- Focus on Four
Guide kids to adopt the four-part piggy bank concept in their savings plan. Every dollar of income is divided among four buckets: spend, save, grow and give. "Spend" is what they use now, "save" is for things they want soon, "grow" is for something far in the future, and "give" is to help others.
- Match That
Reinforce positive behavior by adding a matching contribution when kids take the initiative to save. This approach can help them start their savings plan or pursue a specific challenge, such as accumulating funds for a school trip. It also teaches the value of delayed gratification by encouraging them to let their money grow.
- Put Them in the Driver's Seat
Nothing helps children learn about managing money better than doing it, which is a good reason for them to be responsible for an allowance or small budget. Tying the allowance to assigned chores helps them to understand the value of a dollar and the need to expend effort and produce results to earn it.
- Stress a Simple Formula
Whatever their age or knowledge level, following a simple rule will go a long way toward anyone's financial security: spend less than you make. When expenses are greater than income, money is more difficult to manage; and when income is greater than expenses money is easier to control. A financial representative can help you create a financial plan that will help you follow this formula and meet your long-term goals.
- Seize the Teaching Moments
Whether you demonstrate comparison shopping at the grocery store or explain your family budget at the next back-to-school sale, every day offers possibilities to increase children's financial literacy. A recent survey by themint.org uncovered how families handle visits to an amusement park. Most parents (80%) will cover admission costs for their children, and half will give the children a set amount of money to spend on extras, including food. A third of parents let their kids use their own money for extras. Another 7% of parents will buy their kids anything they want, and an equal number would not let them spend any money on incidentals.
Educators are recognizing the importance of financial literacy, and dozens of states have some level of state financial education requirements for K-12 classrooms. Children will be better prepared for an independent future if the adults who love them take time not only to save for their future but to teach them what they need to know. Learning and practicing early in life will build strong financial habits for the future.