From getting dollar bills under their pillows from the Tooth Fairy to bringing home their first paychecks, there are many opportunities for kids to learn lessons about earning, saving and spending as they grow up.
These childhood milestones may not seem like a big deal at first, but they can be ways for your children to develop a disciplined mindset around money and a solid financial foundation. Here are five times you’ll be able to teach your kids about money management.
THEIR FIRST TIME BUYING A GIFT FOR SOMEONE ELSE
You might be tempted to let your kids browse the web to pick out a holiday gift for grandma and then pay with your credit card, but they’d be missing out on the joy of seeing how their hard-earned money can bring happiness to others. “It’s a great lesson in the value of working hard, saving and planning,” says child psychologist Forrest Talley.
He recommends parents help kids make a list of recipients and set a budget for each gift, based on how much they realistically are able to save. While it’s appropriate for parents to subsidize the gift fund for younger children, Talley advises having the child contribute a portion of their own savings, whether from their allowance or extra chores they perform.
“If they end up being unable to give gifts because they failed to save, this also becomes a lesson learned,” he says. He adds there’s no need to belabor the point. “If siblings have given out gifts, this observation alone will usually make an impression.”
WHEN THEY START PLAYING VIDEO GAMES WITH PURCHASES
Many current video games offer micro transactions that allow players to spend a few points to obtain a fancier costume or a popular dance move for a character. If your kids seem overly interested in these types of add-ons, track a few of them over a week’s time. Then do the math to show how that would multiply over the year and ask them whether they’d prefer a big-ticket item instead. This is a great way to introduce the concept of an opportunity cost, as well as teach them how to prioritize spending.
If your child does choose these extra accessories or levels in a game, just make sure you set a limit. Have your child fund the purchases through chores or an allowance — this way, they’ll learn how it feels to part with their own money and can decide if it was worth it.
LANDING THEIR FIRST PART-TIME JOB
Whether it’s yardwork or virtual tutoring, encouraging your child to find a part time job “infuses a teen with a sense of pride that they have been able to apply their skills in a way that others find valuable, as reflected in a paycheck,” Talley says. But don’t just let them fritter away the cash; help illustrate the power of balancing saving, spending and giving. For example, they may want to put an amount aside for college tuition, spend some of it on a new outfit and donate a portion to a favorite charity.
However, absent a spending plan, this feeling of being suddenly flush with cash can fuel dreams of expensive clothing or tech gadgets. If you sense your child is planning to blow all their dough, Talley says it’s wise for a parent to intervene and point out that buying expensive shoes now might mean they won’t have enough to get a car later.
If they choose not to listen, acting on impulse can teach them an important lesson. “Soon enough the newly purchased item will lose its charm, but the pain of not having money to buy a car will leave an imprint,” Talley says.
WHEN THEY GET THEIR DRIVER’S LICENSE
Most teenagers dream of the freedom that comes with a set of wheels, but before they hit the open road (or subdivision), discuss how they will cover the expenses involved, from increased insurance costs, gas, maintenance and paying for the car itself.
For example, you may have your teen buy their own gas or pay a portion of the insurance. If your insurance company offers a discount for good grades, use that to show how their habits in other parts of their life can influence their finances (such as their credit score). While you’re going over driver safely, be sure to discuss their responsibility for paying for any tickets and repairs — and the increased cost an infraction will inflict on the insurance premium.
You could also give your child the option of earning the right to drive by running errands for you or having them ferry their siblings to their activities.
USING THEIR FIRST CREDIT CARD
Some parents may have a child practice using a credit card when the stakes are low as a way to help them understand how interest can quickly add up if you don’t pay the bill in full each month. It can also establish their credit history.
But Talley advises against this teaching method, preferring to emphasize that if you have to borrow to buy an item, you cannot afford it. “It is important to teach teens not to dig financial holes from which they must later climb out,” he says. “A debit card is a better way to practice using plastic.”
Talley recommends parents put a set amount in an older teen’s account and then designate its use — clothes, entertainment, school supplies, athletics, gas, etc. — for the month.
You can help them build a budget, but then it’s up to the teen to spend wisely to make the funds last.