I first learned about credit as a preteen. If I wanted my bike on Christmas Day, I’d have to get a store-brand bike. If I waited until after the holiday, I could get a Schwinn. I chose the store-brand bike, but as winter passed, I realized that it wasn’t a very good bike and complained to my mother. I was shocked to learn that six months later she was still making payments on my Christmas gift.
That was my first lesson on two important issues: patience and credit. I understood that I should have waited and gotten the Schwinn. I also learned that when you buy something on credit, the attached interest means you’ll pay more. These early life and money lessons matter a lot. Research has shown that kids form their money habits by age 7. Even at a young age, I knew there was something wrong with continually making payments, for what seemed like forever.
3 key lessons
To help children develop a healthy financial foundation, we must teach them about money early on. While there is much to learn about money, it’s the seemingly small, basic lessons about building wealth that are most essential. These principles can help children build good financial habits that will help them for the rest of their lives:
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1. Prioritize needs over wants
Don’t buy what you want and then struggle to afford what you need. For example, if your child receives money as a gift and wants a new toy but needs new socks, encourage her to buy what she needs or suggest an alternative that will let her accomplish both goals. Buying a less expensive toy may allow her to buy the socks, too. Letting your child buy the toy while you pay for the socks essentially means your child has prioritized her wants over her needs. If kids don’t learn to take care of their needs first early in life, you could be raising adults who will buy an expensive piece of jewelry or a gadget while neglecting to pay the utility bill.
2. Spend wisely
This doesn’t mean that you must live a rigid financial life but that you must be mindful of your spending habits. Each financial decision can have a long-term impact on financial wellness. As a parent, you must teach your children to remember their priorities and spend their money accordingly.
Teach your children to consider how a financial decision, even a small one, will affect their goals. For example, say your child is saving money for a certain pair of shoes, but a friend asks him to go to the movies. This places your child at a financial crossroad; he must make a decision, weighing the cost of going to the movie now against his long-term saving goal. This kind of comparison helps kids realize how spending money today can delay their progress toward a larger goal, and it can perhaps aid them at bigger financial crossroads in the future.
3. Save for a rainy day
This is an old adage, but it’s an important one. Kids need to realize that unexpected things can happen, so it’s crucial to save money in case of an emergency. If you have a pet, it’s easy for kids to understand the need to have extra money saved. Should the pet get sick and need medicine, you’ll need money set aside to take care of those unplanned expenses.
The power of education
Nearly every decision we make involves money, from setting an alarm clock so we aren’t late for work to divvying up our paychecks. As children grow, they, too, will have to make financial decisions. Should I go on that trip with my friends? Should I buy a car? Should I go to a technical school or a university? Should I live with a roommate? As parents, our job is to make sure they have the financial tools and understanding to make the best possible decisions.
According to a 2015 report on millennials by Bank of America and USA Today, 41% of respondents identified themselves as being “chronically stressed” about money. Financial education is key to reducing some of this stress. As the author of “Rich Dad Poor Dad,” Robert Kiyosaki, so eloquently stated, “Money is one form of power. But what is more powerful is financial education.” So don’t delay. Start teaching your children these important money and life lessons as early as you can.