It's one of the most important skills for success in adulthood, but financial literacy is often not taught in school.
That means it's on parents and caregivers to help kids learn to save and manage their money effectively, even if they were not taught it themselves.
And research shows that parents could use some tips for teaching their children how to save their money.
A recent study published by the American Institute of CPA's found that kids are spending an average of 5 hours per week on chores and earning an average of $30 per week in allowance (about $1500 per year).
But just 3% of parents reported that their kids save their allowance. The study found that instead kids are spending their money on social events, digital devices, downloads, and toys.he American Institute of CPA
The AICPA officials offers the following advice for parents:
1. Start Early
“Once your child expresses a want, discuss the foundations for budgeting-- delayed gratification and saving for a goal. Give them small jobs to earn their own money to pay for toys or other wants and help them see their efforts grow with a chart on the fridge showing the progress they are making towards their goal.” – Jaleigh White, CPA member of the AICPA Financial Literacy Commission
Dave Ramsey stresses that kids should not be given money for nothing. Rather, parents should give allowance based on extra chores they do around the house. This will help them understand that money is earned, not just given. (Check out his Financial Peace Jr. Kit.)
Just google "age-appropriate chores," and you'll find lots of ideas for how to encourage your kids to help out around the house. Here are some ideas:
2. Set Clear Parameters
“If you decide to provide an allowance, make sure your children understand why they are getting it, how they can earn it and how they can lose it. Some may choose to base an allowance on the completion of chores and make deductions for any chores that aren’t finished. Others may set a base allowance and provide opportunities to earn additional pay for extra chores that are completed. Bottom line, earning money helps to teach children the value of money.” – Matthew Rosenberg, CPA member of the AICPA Financial Literacy Commission
3. Use an Allowance to Talk About Budgeting
“Rather than giving your child money to spend freely, consider an allocation process that rewards them for both short- and long-term thinking. Encourage them to set aside a percentage of the money they earn each week for certain spending categories like outings with friends, short-term savings, and long-term savings such as a college fund. Encourage even more savings by offering to match their long-term savings stockpile dollar for dollar." – David Almonte, CPA member of the AICPA Financial Literacy Commission
Create allowance jars: Forbes Magazine and other experts suggest creating three jars labeled “Saving,” “Spending” or “Sharing/Giving.” Many experts recommend these jars be clear so your child can see the amount growing.
Every time your child receives money - from allowance or a gift, divide the money among the jars.
Use the spending jar for small purchases like snacks or gum. For the sharing jar, help your child choose a good cause to give to. This could be a charity, a friend in need, or maybe a religious institution. The saving jar should be for more expensive items, such as toys they'd like to save up for.
Each time you add to these jars, talk to your child about how much is in the jar, how much they still need to reach their goal, etc.
4. Discuss Impact of Impulse Purchases on Goals
“Let your child set their own goals and help guide them towards them. Along the way, teach the principles of saving and budgeting. If a new game console is on their want list, show them how to calculate the amount that needs to be saved each week to reach that goal. For instance, if they receive $30 a week, but want a $240 gaming system, remind them that their goal equals eight weeks of allowance. Then, if there is temptation to splurge on a spontaneous item, like candy in the check-out aisle, ask whether it fits into their budget. This will help teach how skipping short-term wants can help them reach their long-term goals.” – Monica Sonnier, CPA member of the AICPA Financial Literacy Commission
5. Talk Often
The more you engage your child in financial discussions, the more likely they are to learn. For insight on how to talk to your kids about money, check out the AICPA’s 360 Degrees of Financial Literacy website at www.360FinLit.com. There you will find an assortment of free videos and articles about the basics of budgeting as well as a collection of calculators to help show and track financial progress.
Open a savings account. - As your child gets older, consider opening a bank account and begin to explain interest to them. See if your bank has a special no-fee and no minimum balance account for children.
Include your child in some financial decisions. - Obviously your child shouldn't be in on the very grown-up financial discussions that take place in your home. However, discuss with them why you choose generic brands or name brands, talk about finding deals, and discuss why you might buy some items in bulk.
You might even run experiments with them by buying generic items and then brand name items, and deciding if the brand name was worth the extra cost.
You can also discuss opportunity cost by explaining that if they buy a certain item, they may not have money to buy something else they want.
Point out sales tricks. - Now is a good time to begin point out to your child some of the strategies that advertisers use to sell to us. For example, point out that even though commercials make it look like you'll have more friends or be happier with a certain product, we know that isn't always true.
Sell lemonade (or something) - If your child seems interested, encourage them to run a lemonade stand, yard sale, or some other product they are passionate about. There's no better way to learn about money than in a real world setting like this.
Teach teenagers about credit cards. - When kids arrive on college campuses, they'll be offered credit cards right and left. Now is the time to teach them how credit cards works, and how and why they should avoid debt.
What tips and tricks do you have for teaching kids about money? Share in the comments below!