Children remember simple, repetitive instructions. Brush your teeth twice a day, do not cross the road at a red light, eat your vegetables – there is a reason these statements work, but they only work if you do. It’s the same with money; if you want your kids to be good with money, they need to see you make smart choices. How you manage your finances when you are with your children can be even more important than what you teach them about money.
In other words: Practice what you preach† If you want your children to develop sensible spending, saving and budgeting habits, make sure they see and experience how to make wise financial choices for themselves. But beware: it takes time.
Nevertheless, if you make the effort and consistently get a clear message across, you will instill good habits that will make your children financially savvy. Here are five tips to help you do just that:
Use your earnings wisely, that is, what to do with Grandma’s birthday present
Trying to prevent your kids from wasting the money they got for their birthday can be nerve-wracking. Make sure you are not alone. “Are you sure you want to spend the money on this?” is probably a phrase that all parents will say one day.
Remind your kids that just because they can buy the toy, tennis racket, or Tesla, does not necessarily mean they have to buy it.
Show your children that attenuating such small impulses can lead to bigger things later on. And put effort into modeling rejection of impulses and path choices. Over time, they will see their money grow rather than disappear – and experience delayed satisfaction.
2. You need an income, aka: why pocket money is important
Pocket money teaches children the value of money. By gaining experience at a very young age with financial successes and failures, children learn how to manage their pocket money well. Giving kids a budget to stick to can encourage smart decision making and teach them to make their own cost-benefit decisions.
This also means teaching your children to live within their abilities. If they have spent all their monthly pocket money in the first week, do not give them more if they want more. It will help them to experience delayed gratification.
3. School costs money, aka: having a long-term plan
Morningstar is about investing in the long run. It can be hard to sell for your teenager, who probably thinks 10 days is already “long”. But if they realize that planning ahead will help money grow, they will listen. Suggest that they start modeling their own portfolios as they get older. Then it’s worth learning about investing and financing – and the benefits of making these strategies work for them.
But also teach them to have realistic expectations and find a strategy that also works under market volatility. And do not look at your portfolio every day, because in the long run it is better to ignore the daily hectic.
“If you put your portfolio back a little bit further, you reduce the likelihood of making changes that you might later regret, such as selling stocks at the bottom of a bear market,” said Christine Benz, director of personal finance at Morningstar. And remember, the 152-year record in U.S. market returns has been filled with bear markets. In both cases, the market eventually reached new heights.
4. Do not compare yourself with others, but compare yourself with yourself
Christine Benz also recommends this for children and teens. Not everyone has the same resources at their disposal. And even though peers have a better financial starting point, that does not necessarily mean they will always be ahead. Admittedly, such inequality is difficult for children to digest, and social media does not help either. Snapchat, Instagram or TikTok are full of influencers who post their lavish lifestyles – or give unreliable investment advice.
But compare yourself to yourself – measure your progress with your financial situation and your investment portfolio (or your child’s) and see the improvements you have made. And do not forget to celebrate the small victories in this process!
5. Think of the less fortunate, in other words: emphasize the importance of giving
When kids are old enough to make their own money, be sure to teach them to give. They can choose a charity or organization they want to support. In this way, they experience how giving not only affects the recipient, but also the giver. Benz urges older children to pay attention to what she calls “time-on-earth allocation.” Find a balance with how you spend your time and money so that it gives you joy and does you good, she says.