|Money Management for Children 101 |
Sunday, August 13 2017
I often talk about money management for children, but it seems a lot of parents donít understand just how important these lessons are. Do you really think when your child becomes an adult they will automatically know how to manage money? It doesnít work that way, understanding finances is a process and it is better to teach children the value of a dollar and what to do with it, sooner rather than later. I have a six-yearold Iím teaching the rules I learnt about money and financing while doing an MBA. Guess what? It works! Use simple enough language and they are concepts that even a child can grasp. Teaching these principles to your children will not only serve them well in life but will make your life easier too.
Opportunity Cost: Simply put it means you have a fixed amount of money but a number of things you need to do with the money. Since there is never enough money to do everything at the same time, a choice has to be made.
So in order to spend the money on one thing, you have to forgo the opportunity of the other thing.
I teach this to my son in terms of the things he wants.
He wants a new learning tablet (letís forget that he has already destroyed three) so I agreed on the conditions that for an entire term he be on his best behaviour at home and at school, he has to forgo his allowance for the term to contribute to the cost of the learning tablet, and he canít ask me to be buying a lot of other stuff during the time, since I canít save the money for the tablet and get everything else too. We drafted a contract and laid out the responsibilities of each party and signed.
As children always do every so often, he gets a bad case of the Ďgimme, gimme, gimme, get, get, getí and I refer to the contract. Itís very effective to have things in writing. Recently while waiting in line at the cashier, my son fell victim to the candies on display and demanded I buy him some. I calmly went through the whole routine, explaining why I didnít have enough money to do both and if he would prefer the candy over the learning tablet.
After I was done and he had agreed the he didnít need the candy, the lady in line turned to me and said, ďWell done Mummy.Ē Another positive of teaching a young child the concept of opportunity cost is that they learn to delay grati_ cation.
This skill is something critical for successful academic achievement and has been linked to better health and healthier relationships. Unfortunately not every child is born with it but you, as a parent, can use concepts like opportunity costs to improve your childís ability to delay gratification. Itís already been four months and counting and my little sprout is holding out really well for his reward. The caveat is that you have to deliver what youíve promised or youíll be teaching your child that thereís no need to hold out since there is no reward in the future.
Budgeting: This goes hand in hand with the idea of opportunity costs. It continues the concept that you are working with a fixed sum of money and more needs than your resources can cover. It is an exercise in fiscal discipline.
Your child will learn the idea of prioritising their needs and differentiating between a need and a want. This is something some adults havenít even grasped yet. A child that knows how to budget is already way ahead of the financial game. Just remember a child canít make a budget without some form of income. You can give a child an allowance, I tell my son his job is to go to school and study hard so he gets an allowance for that. He lives in a home and is clothed and fed, so his chores are his contribution to the home (I donít think the world needs another man that feels he should be rewarded for doing a little housework). Some parents do it the other way around and pay children to do chores rather than give an allowance. Either way you have to give them the resources and give them the chance to manage it and to fail without judgement. Itís better to fail at managing $5 than to fail at managing $500,000 and the lessons learnt from the $5 will serve your child throughout their life. Iíd say thatís a really good investment. When my son makes his budget and spends his money I have no say. He can blow it all on candy filled with the most artificial colouring and flavouring in the world. I may make a suggestion but it is his money to manage and he loves the independence. Itís also great for me since I can arbitrarily refuse to purchase anything he asks but suggest that he can use his own money to buy it if he thinks itís worth it, which he rarely ever does. For big ticket purchases I ask him to save and make a determined contribution, that way we both contribute and he takes better care of the item since he knows how much he sacrificed to get it.
Real wealth vs the appearance of wealth: This is a difficult one but necessary. We as a people are shallow and look at the superficial to determine someoneís wealth. Truth be told most people have houses and vehicles they canít afford. They project the image of success but they are up to their eyeballs in debt. Should they meet with some financial difficulty, or medical emergency it all gets flushed down the toilet. Real wealth means being financially stable, not walking a debt tightrope for 30 years to look like you have something. It is difficult to teach children what real success looks like. Images in the media continue to portray success as the flashy car, designer clothes, and a mansion in a wealthy neighbourhood. As a parent it is our task to reframe the idea of success to reality, a good education, healthy investment portfolio, low debt, and financial security. I read a lot of business magazines and recently one article argued that the indicators of wealth have changed. The wealthy spend money on living well, being healthy, eating well and being fit, they invest in the best education for their children and spend money on experiences like travel and hobbies rather than being ostentatious. Helping children to know the difference between the real wealth and the image of it will reduce the pressure on them and make it easier for them to make sound money decisions. Iíd rather my son invest $20,000 in a high yield mutual fund than a gold chain, or save 20 per cent of the cost of a home for a downpayment than have a collection of video game consoles or designer sneakers.
The best way to teach your child about managing money is to become wise yourself, itís called modelling.
You canít teach what you donít know. How do you know a child is ready? The moment they can add and subtract and they understand the concept that not all money has the same value, your little sprout is ready. Raising a financially wise adult is a process and the earlier you start the better.