Teaching Kids About Money For Life-Long Healthy Financial Habits

Kids catch onto the importance of money in life pretty quickly as they watch us use it. The way to show your child the value of a dollar is by teaching them the different ways a dollar is used.

Begin When They're Young
Begin explaining to your child how money works from a young age. It's important for kids to know you get money by earning it. Items (or services) in life are given in return for money, and the value or worth of that item varies according to the seller. If you do not have enough money, you can not purchase the item.

A follow-up to this is talking about saving money. A child with a couple dollars could go buy a piece of candy (that'll be gone in 10 seconds) or an inexpensive toy (that will be broken in 10 minutes or completely forgot about the next day). However, if that child decides to save those dollars, a better item can be purchased that may have more meaning and last longer.

Have A Savings Plan
One way to teach children about savings is setting a percentage they should save every time they earn money. Ten percent is an easy sum to learn; simply move the decimal point one space to the left. For every $1.00 earned, $0.10 will be saved ($23.48 earned, $2.34 saved).

This savings isn't for a better short-term item, but for a "rainy day" or even a car or college fund. The remaining $0.90 can be used for the candy or "better item" as mentioned above. This principle can teach the child self discipline for very long-term savings (i.e. a house or retirement when they're an adult).

Sure, a six-year-old won't understand the "rainy day" concept, and driving in ten years may be discouraging. But after saving 10% over the years, it'll add up. This teaching is especially helpful when they get their first job and are already in the habit of saving that 10% for long-term use.
You might also set aside a certain percentage for charitable giving, so kids can also learn about this important aspect of managing money.

As Your Child Grows
When your child is more mature, take him or her to the bank with you and open a line of savings in their (and your) name. Once or twice a month, take your child to the bank so they can deposit their money into their account. Let them see the bank statement and watch how their money is growing with the help of interest.

Interest is a huge part of using money. Either it'll make you pay more than what your item was originally worth (credit) or it can help you make more money. Teenagers need to understand that unless you can pay off that debt within 30 days, you'll actually be paying more for your purchased item.

One way to show how detrimental or great interest can be is by doing some role-play. Pick an item your teenager currently wants to purchase on a credit card. Make a chart showing how making only the minimum payment affects the total debt (you'll also need to explain APR), how long it takes to pay off the debt with minimum payments, and how much interest is paid in total.

On that same note, take the number of months it took to pay off the credit card and show how much interest he/she'd be making in a savings account while putting money away to save for that item. The amount of interest isn't much, but the point to make is if you save money to purchase the item, you will only pay that sum without the additional cost of interest.

When children understand how money works they'll (hopefully) be more inclined to use responsibility when making money decisions.