Do you ever worry that you are passing on bad spending habits to your children? If so, you are not alone. A recent study by personal finance start-up HyperJar showed that 15 per cent of parents worried they are not setting a good financial example.
Elsewhere, T. Rowe Price’s 11th Annual Parents, Kids & Money Survey found that nearly half of parents don’t talk to their kids about money or how to budget at all. Yet the same study showed that kids were eager for their parents to impart financial wisdom with half the children saying they wished their mum and dad taught them more about the value of money.
With studies suggesting that a sound understanding of budgeting early on in life can make kids more likely to succeed financially as adults, and that the financial values children retain as they grow up originate primarily from their parents, suffice to say we as parents should be passing on the basics of how to budget from an early age. Especially given the evidence from the University of Cambridge that money habits in children are formed by the time they’re just seven years old.
Here’s how to give your kids a vital life skill that will help them grow into responsible spenders.
Create a family spending jar
A family who saves together knows the value of money, so creating a family spending jar is a fun and savvy way to teach kids how to budget. It is a good idea ‘whether it’s teaching your kids to manage their pocket money, putting a collective jar together to save for your summer holiday or keeping track of how much you spend on the weekly supermarket shop,’ says Mat Megens, CEO of HyperJar. Putting money in the pot each week can also show children how easy it is to build up a small nest egg of savings.
Give them a three-slotted piggy bank
Kathy Longo, author of Flourish Financially: Values, Transitions, & Big Conversations, advises giving primary school-aged kids a piggy bank with three separate slots. ‘It’s important to teach kids about money in a tangible way. Three different slots to separate money for saving, sharing and spending can help them understand the connection between the money in their piggy bank and the new toy they bought,’ she says.
Break it down to basics
Explaining the concept of saving to your kids in simple terms will hopefully help them go some way in realising the value of money. I recently told my 13-year-old, for example, that the minimum wage for a 16 year old was £4.81 per hour (approx. AED25) and told him to try and work out how many hours it would take to save up for those trainers he desperately wants. He was shocked to discover it would take over 14 hours to earn the money to buy them himself.
Encourage them to earn
Encouraging children to earn their pocket money could help give them greater satisfaction in the long-term, rather than the instant gratification they so often crave. Incentivising them with age-appropriate chores, such as making their bed, emptying the dishwasher or tidying their bedroom, should help them feel a sense of satisfaction and achievement.
Don’t make it too easy for them
When you’re out and about and have a young child asking for a toy they desperately want, it can be easy to give into pester power. But dishing out money at the drop of a hat will not show them the value of it. ‘While borrowing [from you] certainly is the easy option to get the item they may want, earning this money themselves will also encourage them not to rely on a credit buffer,’ says Megens.
Remind them that they can’t have everything
Reminding your children that they – or rather you – cannot always afford everything they want will help them to be realistic about their birthday/Christmas/Amazon wish list and help manage their expectations. ‘Instead, offer to help them budget their pocket money so that they can plan for purchases in line with the money they do have while encouraging them to save for larger purchases,’ advises Louise Hill, co-founder and COO of GoHenry, a prepaid debit card and financial app for families.
Set spending limits and saving goals
Some financial apps and debit cards allow parents and children to set spending limits and goals which can be a good way for children to learn how to budget while working towards expensive purchases. ‘Interactive learning can be a great way to engage kids and help them to put the new skills they have learnt into practice such as how to make a budget and setting saving goals,’ Hill says.
Talk to them about credit and debt
If you have teenagers, you should talk to them about the concept of credit and debt, Hill advises. ‘Make it clear to your kids that borrowing isn’t inherently bad – but it is vital to read the small print, understand APR and make sure they can meet repayments. It’s far easier to get into debt than it is to get out of it, so talk them through the pros and cons of each option and make sure they understand the consequences if they don’t pay the money back,’ she notes.
Cash is no longer king so although counting up the pennies and pounds (as well as dollars or dirhams) may help younger children understand how money works, going digital could also be useful. ‘As we live in an increasingly cashless society, it makes sense that the pocket money should also be digitalised in the same way,’ says Megens. ‘As a result, kids become familiar with spending by card from a younger age, which can prevent bad habits and careless spending from developing in the future.’
Teach them the gift of giving
As well as teaching your kids the value of budgeting, it’s also worth showing them the importance of giving, such as by donating toys they no longer use, or clothes they have grown out of. ‘You can strengthen that by talking about charities you support with money and/or time,’ Longo says. ‘This is a great way of showing them that valuing money also means helping those less fortunate.’