Most people make financial mistakes at some point in their lives, be it a credit card default, reckless spending, or a poorly managed monthly budget. If you’re among them, you know how frustrating such mistakes can be, so you’ll want to minimize the chances of your child making them.
While your young one might not be interested in financial management, starting their education early can be highly beneficial. By adopting the right behavior and habits during childhood, they won’t need as much conscious effort to manage their money wisely throughout adulthood.
If you’re not sure how to help your child build the necessary skillset, this article will give you some actionable advice for teaching kids about money. We will present the most important lessons they should know and explain how to make the learning experience engaging.
Why Teach Kids About Money
According to a survey by the National Financial Educators Council, an average American lost $1,819 due to financial illiteracy in 2022. Despite the estimated nationwide loss of $436 billion, it doesn’t seem like there are enough financial education programs, especially for children.
Tanya Van Court, the founder of Goalsetter, says that 87% of teens “don’t know how to manage their money.” This isn’t a surprise considering that financial education isn’t a part of many schools’ curriculums.
With this in mind, it’s up to parents to ensure their children have adequate knowledge and skills to manage their finances properly. The good news is that there are various ways to do so.
How To Teach Kids About Money
To ensure your child develops a healthy relationship with money, you’ll need to cover various aspects of financial management. Take the following steps to leave no stone unturned:
- Help your child understand the value of money
- Explain the difference between needs and wants
- Teach your child how to budget
- Encourage saving and long-term thinking
- Introduce your child to the banking system
How To Teach Your Child the Value of Money
While children may understand that money is a finite resource, they might struggle to apply this knowledge. It’s not enough to merely tell your child something costs a certain amount of money—you should explain the practical implications of that cost.
Introducing the concept of opportunity costs is among the best ways to do this. It will teach them that buying one thing might mean they’ll need to let go of another. For instance, you can give them $10 and show them two toys where one costs $7 and the other $8. When they can only pick one, they’ll see that there has to be a trade-off.
Another approach you can take is to store their pocket money in a clear jar. Whenever they want to buy something, they should take the money out. Once your child sees the money physically disappearing as they spend it, they’ll learn to value it more.
Help Your Child Differentiate Between Necessities and Luxuries
Most children are impulsive to at least some extent. When they see something they want, they turn it into something they need. You should help them set a clear line between the two so that they can make rational spending decisions.
Teaching by example is the best thing to do here. Take your child grocery shopping and put items in the basket in a particular order based on their importance:
- Necessities—Eggs, milk, bread, etc.
- Non-essentials—Peanut butter, pasta sauce, canned soup, etc.
- Luxuries—Gourmet foods, home decor items, etc.
As you add items to the basket, explain the reasoning behind your categories. Then, you can translate this to their language by giving examples close to them—pens and notebooks fall under needs, while ice cream and comic books are wants. With time, your child will learn how to avoid haphazard, emotion-driven purchases.
How To Teach a Child To Budget Money
Source: Alexander Grey
Budgeting is among the most essential skills your child will need their entire life. Regardless of how much money they make in adulthood, they’ll need to spend it sensibly to maintain their financial stability. The sooner you teach your child to stick to a budget, the more mindful they’ll be of it later in life.
Giving your child an allowance is a great way to get started with budgeting. By having a specific amount of money for a fixed timeframe, your child will need to learn how to organize their finances.
You can make the process more fun by letting them use a budgeting app. Help them set up different categories and dedicate a portion of their budget to each. The following table gives an example assuming your child’s allowance is $20 per week:
To ensure your child stays disciplined, don’t give them extra money if they go over the budget unless there’s an emergency. This will help them understand the importance of rational thinking and the consequences of overspending.
Stress the Importance of Saving
Your child should know that life is unpredictable and that having some money tucked away can buffer this uncertainty. If they’re too young to understand this, you can explain the importance of saving by encouraging them to set aside some portion of their allowance for a large purchase they want to make.
Either way, there’s a lot you can do to help your child be frugal and save up. If they qualify for a debit card, you can open a bank account in their name and help them save money in it. If you want to start sooner but still need something better than cash, a prepaid card can be a good option.
As your child sees money accumulating on the card, they’ll be more inclined to grow their savings. You can keep track of their spending to help them find new opportunities to save up and avoid impulsive decisions. Show your child the value of long-term thinking, and they’ll have a safety net that can bring them peace of mind.
Teach Your Child About the Banking System
Source: August de Richelieu
As your child grows up, banks will become virtually unavoidable. Your child will at least have a checking account they’ll use to get paid. Make sure they’re ready for it by teaching them about the following:
- Bank statements
- Online payments
When the time comes, you’ll want to devote special attention to credit products. Your child will likely need them at some point, so they should be ready to take on the responsibility of borrowing from banks.
Teaching your child about credit in practice might be hard because most teens aren’t eligible for loans and credit cards. Besides having a good credit score, your child has to meet certain age criteria to qualify. While the legal threshold is 18, they may not obtain a credit card before turning 21 unless they meet one of the two requirements imposed by the CARD Act of 2009:
- Demonstrating an independent ability to repay the debt
- Having an eligible co-signer over 21
Some parents add children to their credit cards to teach them about credit and help them build a credit profile sooner. Unfortunately, this isn’t an effective way to reach either of these goals. It carries a high risk because your child may misuse the card and deepen your debt.
Besides, adding a child as an authorized user doesn’t build an independent credit profile for them. As soon as you remove them from the card, they have to start over because all credit history associated with the card gets deleted from their profile.
If you want to move beyond education and take action to make your child’s financial future easier without the above drawbacks, choose FreeKick.
Enjoy Safe Credit Profile Building and Monitoring With FreeKick
Powered by Austin Capital Bank, FreeKick combines a Federal Deposit Insurance Corporation-insured (FDIC-insured) deposit account and additional services to help parents in two ways:
- Building credit for children ages 14–25
- Monitoring their credit profiles
Build Your Child’s Credit Profile Without Risk or Effort
A strong credit profile can save your child over $200,000 throughout adulthood. You can get started in three quick steps:
- Make a Deposit—Go to FreeKick.bank to choose a plan and create an account
- Set It and Forget It—FreeKick takes over as soon as you create the account and builds 12 months of credit history for your child through a no-interest credit builder loan paid from the deposit
- Keep Growing—When the 12-month term ends, you can renew the account for another 12 months or close it and get 100% of your deposit back
You can choose from three plans based on a one-time FDIC-insured deposit:
|FDIC-Insured Deposit Amount||Plan Fee|
As FreeKick builds your child’s credit history, it will get reported to the three major consumer credit bureaus if they’re a legal adult (18 and over in most states). Minors can also build a credit history, and it will be reported once they become an adult.
Despite the 12-month commitment, you can close your account at any point without penalties. Note that if you do it while your child is still a minor, no credit history can be reported on their behalf because credit bureaus only allow reporting for adults.
How FreeKick Monitors Your Child’s Credit Profile (Coming Soon)
When you sign up for FreeKick, you can rest assured your child’s credit profile will be free of red flags. FreeKick will monitor their credit profile at no extra cost to take this responsibility off your hands.
Ongoing monitoring also significantly reduces the chances of identity theft. One in 50 U.S. children falls victim to this crime each year, and FreeKick can help ensure your child doesn’t become a part of this statistic through numerous measures.
The Social Security Number Tracing service detects signs of identity fraud by tracking all names, aliases, and addresses associated with the child’s SSN. This makes it less likely that someone can use your child’s data to create a synthetic identity and defraud lenders.
Other services protecting your child’s information include:
- Dark Web monitoring—FreeKick monitors all internet activity associated with the trading of personal information using the CyberAgent surveillance system
- ID Theft insurance and full-service restoration—If your child’s identity is jeopardized, a certified restoration specialist will dispute fraudulent activity and restore it. FreeKick covers ancillary restoration services with a $1 million insurance
- Neighborhood Sex Offender monitoring—If a registered sex offender lives in your vicinity and uses your address to register under a different name, you’ll get an alert and a detailed report
Financial criminals target minors because their identities are often unused, but young adults aren’t immune to identity fraud either. That’s why FreeKick safeguards their information with additional services, including:
- Lost wallet protection
- Change of address monitoring
- Payday loan monitoring
- Court records monitoring
Have your child’s credit profile established, built, and monitored by experts—create a FreeKick account.
Featured image source: Karolina Grabowska