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5 Powerful Ways to Teach Kids About Money
1. Encourage Entrepreneurship
It may seem strange to think about it in these terms, but there are plenty of opportunities to encourage your kids to become entrepreneurs.
Take the ever-popular lemonade stand. This tried and true business opportunity is a low-risk way of teaching your kids about selling a product.
But too often, parents stop short of even more teaching points. Here are a few other financial concepts you can consider:
Selling a Product
At a very basic level, children will pick up on this first. Sell customers lemonade, and they will pay you money. Give something away and get something you want in return. But there's so much more.
Supply and Demand
Consider having a short conversation about when to sell the lemonade. Explain why you probably want to sell it in the summer when it is hot outside, instead of in the winter when the demand will be much lower.
You could explore selling the lemonade for $0.50 when the temperature rises past a certain point, and $0.25 at other times.
If it is winter instead, explain the concept of diversification of products. Sell hot chocolate instead of lemonade to gain sales all year around!
Income, Costs, and Profit
Introduce the concept of costs back into the equation. Explain to your children that they will need to purchase cups, lemonade, water, and sugar in order to make the lemonade. These components come with a cost, which must be subtracted from the money they make in order to calculate profit.
Loans and Interest
If your kids do not have money to buy the raw materials themselves, it's a perfect opportunity to help them understand loans and the concept of interest.
Allow them to take out a loan with the "Bank of Parents", requiring them to pay back the loan along with interest (make sure it's a small amount - no reason to crush their spirits in the process).
2. Let Them Plan the Monthly Budget
If you use a budget for monthly expenses, why not let your child take responsibility for it one month?
This can especially work if you use tactile systems such the Envelope Method. Here's what you do.
The purpose of this system is to help your kids understand the responsibility involved with money, and also the finite nature of the resource.
But there is one more lesson budgets teach that you do not want to miss. If the envelope is empty but your child wants to do more in that budget category, explore ways to make more money.
Robert Kiyosaki explains in his book Rich Dad Poor Dad how "I can't afford it" should never enter your vocabulary.
If you're interested in reading this amazing book, check out the search tool below!
3. Pay a Large Allowance
Allowance can be a contentious topic. Some parent's believe it should be used as a way for kids to buy what they want. Others believe allowance will incentivize chores or good behavior. But neither of these have ever set well with us.
Getting something for nothing is a poor way to teach how the world works. Other than gifts, you will likely need to trade your time and skill for money, and it is important to prepare kids for this reality.
And providing incentives for doing chores teaches kids that they are not responsible for the healthy functioning of the family. Mom and Dad take care of laundry and dishes because they have to; when kids do it, they get paid for the effort.
Instead, treat chores as mandatory aspects of the family unit. Allowance can serve a much larger purpose.
According to John Lanza in The Art of Allowance, you could consider giving children a much larger allowance but requiring them to pay for certain things throughout the month. Hair cuts, school lunches, new toys - these are all prime opportunities to teach your children the responsibility that comes with finances.
4. Establish a Savings Account
One of the most difficult aspects of teaching children about finances is the nebulous nature of money.
Take, for instance, the concept of saving money for the future. Even adults have a hard time delaying gratification in favor of such a far-off goal as retirement. How can you possibly impress something this ambiguous on your children?
Enter the savings account. One major advantage of a savings account (i.e. a guaranteed, but low, rate of return) is that your child can see their account growing each month.
As with budgeting, the key is to help them understand the reality behind the numbers. Consider taking your child to the bank with you to deposit or withdraw from the account. Let them touch the money and hand it over to the teller themselves. Let them explain what they want to do with the money - "please add this to my savings account" they may say, or "I'm saving for a new bike!"
5. Begin with Responsible Habits
Underlying the rest of these tips is establishing responsible savings and spending habits.
Take the allowance example above. Work with your children to save a large portion of it before any expenses are taken. 20% may be a good starting point, depending on how you plan for them to use it.
Another good option is charitable giving. Encourage your child to give out of each allowance instead of keeping the remainder-after-savings for themselves.
If your child sets up a lemonade stand, teach them how saving their profits instead of spending them can help their savings account grow even quicker. Tie each of the other tips above together.
Understanding financial principles may be one of the most important things we can impress upon our children. Future financially-strong decisions and healthy habits begin when they are young, and these 5 Powerful Ways to Teach Kids About Money can help you build the foundation they need.
Do you have any methods other than what I list here? Do you have any frugal teaching wins with your kids? Let me know in the comments below!