One of the more difficult things to do in personal finance is to teach kids about money.

It’s such a foreign concept to them, so it takes some time and practice before they understand how it actually works.

Unfortunately, some people never truly learn how money works, and how they can leverage financial strategies to help build wealth.

MONEY FOR THE ICE CREAM TRUCK

I was chatting with my brother the other day and he mentioned something he was doing with his 3-year-old daughter.

She had some money saved up from birthdays, etc. and my brother asked her if he could “borrow” $1 from her. If she lent him the dollar, he would give her $2 later when the ice cream truck came.

At first, she was a bit hesitant.

Daughter: “You want to ‘borrow’ my dollar?”
Dad: “Yes, if you let me use it now, I’ll give you $2 later! So, you’ll have more, later on.”

Eventually, she agreed to the terms of their agreement. And later, when the ice cream truck came, my brother gave her $2 for her to spend however she wanted.

I thought this was absolutely genius.

It is a simple way of beginning to teach a 3-year-old about investing, interest, and the power of delayed gratification.

OF MARSHMALLOWS & SUCCESS

In the world of psychology there is a famous study called the “Stanford Marshmallow Experiment.”

Led by psychologist Walter Mischel in the 1960’s and 70’s, the experiment was done to study the development of delayed gratification in children, and to see the effects on their lives.

The experiment consisted of bringing a child into a distraction-free room and offering them one marshmallow to eat. Before allowing the child to eat the marshmallow, they would offer them a trade: If they could wait 15 minutes, they would get additional prizes, in the form of another marshmallow, or something else.

There are more recent examples of this experiment, and the videos are quite amusing to watch – kids squirming in their seats, analyzing the marshmallow, smelling it, even licking it. And many succumbing to their impulses to eat the marshmallow NOW!

The study found that there was a correlation between the children that were able to wait longer for their rewards and better life outcomes.

BETTER OUTCOMES

My brother’s story got me thinking: If the ability to control impulse and focus on delayed gratification can increase positive life outcomes, what are ways parents can help teach their children these concepts?

So, here are 12 ways you can help teach your kids about money, and help them become financially fit, later on in life.

1 – Teach Them What It Means To Earn Money

Most kids don’t understand the concept of money and how it is earned through work. When you buy them something, they have no idea the work you had to go through in order to earn the money that you just spent on them.

Also, when you tell them that you won’t buy them something, they just see this as you being mean and not giving them what they want. They have no idea that you might not be able to afford a particular item, or that you are saving up for their college education, instead of buying them a useless toy.

A way to have them understand the concept of earning money is to have them do chores and get paid to do them. The kids will begin to equate the work they are doing with the money they are earning. This will help begin the process of understanding what it takes to support yourself.

So, don’t give kids an allowance for doing nothing. Have them earn the money they want to spend.

2 – Teach Savings Early On

As they earn an income through chores, have them get in the habit of saving portions of the money.

You can use a bucketing strategy, and teach them about the different areas you must save for: Emergency fund, short-term goals, long-term goals, charity, college education, etc.

You can choose whatever buckets you’d like, but the important thing is that they begin learning that you don’t want to immediately go out and spend all of the money you earn.

3 – Set Goals And Create Plans

If they want a bigger item, like a new bike, have them set up a savings plan in order to buy it themselves.

Help them calculate how many chores they’ll have to do, and how much of that money they’ll need to save versus spend it on short-term things like the ice cream truck, etc.

When the time comes that they’ve saved up enough money, make a REALLY BIG deal out of the fact that they set a goal, put in the hard work, saved the money, and EARNED something they wanted.

This lesson is monumental.

4 – Use A Clear Jar To Save Money

The idea of a piggy bank is cute, but it doesn’t allow the child to actually SEE their savings grow.

By using a clear jar, they can see it grow every day, week, and month. It’s much more tangible than some opaque piggy that seems more like a black-hole than a savings vehicle.

5 – Teach Kids About Opportunity Cost

This is an economic principle, and is just a fancy way of saying that if you buy one thing, you can’t use that same money you spent to buy something else.

If your kid really wants to buy that bike we discussed earlier, every time they buy another toy means it will take them longer to save up enough money to purchase the bike.

This doesn’t mean you should force them to save, but you should explain to them every time they want to purchase something that it means they will have to wait longer for the other item.

6 – Fight Impulse Purchases

If every time you are at the super market and they see a candy bar, you buy it for them, then you are teaching them that it’s OK to buy on impulse.

Impulse shopping is a big cause of many poor financial situations.

Either say no, and be adamant about it, or, if you know they are going to want a bunch of things at the store, have them pick a specific item BEFORE you go to the store. Have them agree that this will be the ONLY thing they purchase, no matter what else they see.

Without a doubt, they will break this at some point and ask for something more. But this is when you say “no” and show them that they must stick to their plan.

7 – Teach Giving

In a past article, I wrote about how you can literally buy happiness. One of the ways you can do this is by spending your money on other people.

Parents are always saying how they just want their children to be happy. Studies show that you can increase happiness by donating money and doing good deeds.

You can’t guarantee your kid will love their job or the city they live in, but this is a way you can have a direct impact on their happiness.

Teach them this lesson and you’ll have empowered them with the ability to give themselves a happiness jolt whenever they need it.

8 – Buying Things Doesn’t Make You Happy

Experiences are more meaningful than material possessions.

Try and steer your kids toward saving their money for fun events that they’ll remember, not the toy that will break in two weeks and they’ll forget about.

9 – Get Your Kids Familiar With Investing & Compound Interest

This is exactly what my brother was doing with his daughter. She was learning that if you “invest” your money now, you could get back more later.

You can even give them interest payments on their savings if you want. In those “buckets” we discussed earlier, the money in the long-term buckets can earn an interest rate and grow.

You can make it a big event each week or month when you add to their bucket because of the interest they’ve earned.

10 – Explain The Risks of Debt and Credit Cards

Just how kids don’t understand the concept of investing and compound interest, they don’t understand the concept of debt and interest payments.

Walk them through scenarios where they are borrowing money now, but have to pay back more in the future.

Some industry experts advocate teaching kids to NEVER use debt. I don’t fully agree with this idea, and I believe debt can be used in positive ways to help grow wealth. You can read about those concepts here and here.

But your kids should absolutely understand the risks of using too much debt, and getting in over your head with credit cards.

11 – Teach Your Kids How To Earn Money

Sure, you are giving them money to do chores, but that’s low-hanging fruit.

If they really want to start earning some money, help them brainstorm ideas.

A lot of the traditional side-jobs come to mind: shoveling driveways, raking leaves, mowing lawns, baby-sitting, etc.

But what about some new-aged ideas like garage-sale hunting?

Gary Vaynerchuk is famous for getting people to go bargain hunting at garage sales.

They will go find things at garage sales, look them up online and see what that item is selling for on market-places like eBay or FB marketplace, and then flip them for a profit.

People are making $1,000 per week or more by doing this strategy.

When I was in junior high school, my mother bought me an economy sized bag of candy (lollipops, etc), and I’d sell them to my classmates for 25 cents a pop. I used my profits to buy more and more bags, and continued the cycle.

The ideas are countless, but it is difficult for a kid who has never had to earn money to think them up. So, help them out a bit.

12 – Track Your Kid’s Spending

Most adults have a difficult time recalling how much they are spending in each category of life, so how can you expect a child to do this?

By tracking where they are spending their money, you can go over it with them from time-to-time and show them how much they are spending in each category.

If they’ve been trying to save for some specific goal, but have been coming up short, this might help them understand why.

It just might be the catalyst that will help them curb their spending in certain areas, and redirect it toward saving for their ultimate goals.

THE BOTTOM LINE

It’s amazing for me to see when parents get frustrated with their children for not understanding the decisions they are making in regards to money.

These are usually the same parents who never take the time to explain how money works, or why they are making the specific decisions they are.

If you want your children to live a great life, help them understand one of the most important areas: Money & Finance.

Capably Yours,