If there's one thing we were forced to learn from COVID-19, it's how to manage money. Many of us had to cut out all unnecessary spending, and this global pandemic brought to life just how vital a dedicated emergency fund is.
There's no time like the present to teach your children about the importance of money management. Lessons learned now can help them financially prepare for the future and set them up for success. After all, it's a vital life skill that they won't learn in school.
That brings us to the hotly-debated topic of an allowance. No matter what your personal feelings on the subject are, one thing is true:
It's incredibly difficult to teach money-management skills if you aren't providing opportunities for your children to earn their own money.
That can be as little as a few dollars a week, and only upon completion of agreed-upon chores around the house. A word of advice from economists? Don't reward them for things they'll need to do in life anyway, like washing their own dishes. Instead, find other ways they can earn money each week, like washing the family's dinner dishes or feeding the family pet each morning. This can help set the expectation that there are things in life that you do out of necessity and to be a functioning adult, and there are things you can do that allow you to earn money.
No matter the types of duties you give your children or how much you decide to pay them, you can start to show them how to manage those earned funds successfully. Here are three important money-management skills that you can start to teach your children today to help set them up for a successful financial future.
1. The Value of a Hard-Earned Dollar
Since you're providing an allowance for things outside of their normal responsibilities, you're helping lay the groundwork that money involves work; sometimes hard work.
Having clear guidelines of what each chore or duty is worth helps establish exactly what your children need to do to earn a certain amount. That's going to become very important when you introduce this next idea, which goes along with the value of a hard-earned dollar.
Make them responsible for certain purchases, being careful to ensure it's an obtainable goal.
For example, maybe your child wants a new video game. That's something they can use their allowance for. If the item is too expensive and requires months of saving, it can be a frustrating experience. Remember, the point of all of this is to set your child up for success. If they want something in life, they may not necessarily get it right away. They'll have to work, save, and purchase with their own money.
Make it known the types of purchases that they'll be responsible for so that they can keep those different things in mind when it comes time for a transaction. As your children get older, you can introduce the idea of saving and can help them put a portion of their allowance away. That's an important lesson that they can take into adulthood.
2. How Comparison Shopping Can Help Save
Now that your children have ways to earn their own money and know they are responsible for buying certain things for themselves, like toys or games, you can start to introduce them to comparison shopping.
Rather than coming across something in a store and buying it there and then, you can help them do some research. Is it at another store for a lower price? Can it be found cheaper online? Is it an item they can buy used from a family friend?
Comparison shopping is a valuable life skill and, because we, as adults, deal with higher amounts of money, there are more possibilities to waste it. For example, by not comparing lenders when shopping for a first-time mortgage or refinance, you could be paying far more in interest than what another provider may have offered.
That could result in hundreds or even thousands of dollars over the life of your loan wasted on interest. When you factor in all of the things you pay for each month, like health care, auto insurance, your mortgage, and even gym memberships, you could be losing a significant amount of money simply because you didn't shop around.
When you help your child find a better deal for an item, they get to see the money they've saved. If there isn't a better deal available, then they'll likely think hard about the purchase, ensuring it's something they want and will use, since it'll take up a chunk of their hard-earned funds.
3. The Importance of Credit
Most children aren't exposed to the idea of credit until they hit college and get inundated with special offers from credit card companies. The temptation to spend can be enormous, and without having a solid understanding of how much their credit score will affect their future, they can ruin their finances before they have a chance to get started.
That's why it's important to talk to your children about credit early on. Give them real-world scenarios that let them experience credit and how important it is. For example, let's say your child has decided they want a toy, but they don't have enough money. As a reward for them working so hard up until that point, say that you'll cover the difference on credit. Make sure they understand how important that credit is; that you're trusting them to pay you back.
Set a realistic date that your child has to meet that payback deadline. If they miss that date, you have a few options. You can garnish some of their future allowance, stop allowance opportunities altogether for a period of time, or can introduce the idea of interest, giving them an extension but now with interest. No matter what route you go with, it will be a hard lesson learned for your kids but can make the vague idea of credit into a more tangible experience.
Build a Foundation Today
Your kids probably won't be thrilled about having to pay for certain items themselves, but they'll thank you later in life when they have a healthy savings account, have saved money by comparison shopping, and have a strong credit score.
It's never too early to start learning about money; how to get it, how to spend it, how to save it. Think about your own experiences with money. What do you wish you had learned early on? What are you still struggling with? Our children look up to us as examples, so it's important to talk to them about what you wish you had done differently when you were their age and how the choices you made have impacted your financial health now, whether that be in a good or a bad way.
Conversations with your children about money now can help them better prepare for the future, so set a family meeting to discuss finances and allowances tonight!