Teaching Children Personal Finance

On August 28th I wrote a blog about setting up an allowance for children as a tool to teach them how to handle money.  At the age of eight, through a life-changing event, I embarked on a journey of learning about money and how to properly use it because it was no longer plentiful.  Financial literacy is not taught in homes, and only recently has it began to emerge as part of the school curriculum.  If we don't teach our children, they will become tomorrow's bankruptcy statistics.

Here are some suggestions on starting down the avenue of teaching personal finances at home:

1. Begin by giving your child an allowance.  Your child should earn their allowance; this is NOT something that should be doled out indifferently.  For suggestions on how much to give, please check out my blog, Allowances as a Teaching Tool.  This will allow your child to handle their money; when it's theirs, they will tend to protect it.  Once your child realizes the allowance isn't an infinite amount, they will learn how to prioritize. 
2. A budget is the best way to learn how to prioritize.  First, your child should set a certain percentage of their allowance for charity and savings.  I suggest 10% of their allowance for each.  The remaining 80% is for them to spend in any way they wish; this will allow them to keep track of their spending as they are spending.
3. Running errands is the best way to show your children how much things cost.  Take them to the grocery store and let them see the price of common items.  Give them challenges, suggest they only have a certain amount to spend, and they have to put dinner on the table.  Let them figure out how they are going to purchase all the items, including ingredients.  Will this allow them to get other items, such as potato chips and Oreos (my favorite)??  Let them see the price of dry cleaning.  Let them see how much it takes to fill up the car, SUV, or whatever you drive, with gas. That should be a real eye-opener.  This will allow them to see how much it costs just to keep a household running.
4. While at the grocery store, make them compare prices.  What is the best buy?  Is it the best nutrition for the money?  What is the cost per ounce for the dishwasher detergent?  Is the cheaper brand the better of the choices?
5. Teach them about credit cards and what happens if you don't pay the balance.  Teach them about interest, what it can do to you and what it can do for you.  They will realize if they purchase things for which they don't have the funds, they have to pay more for them in the form of interest charges; if they have funds saved, they will earn interest on those funds.  Great lessons!!!
6. Explain the difference between needs, wants and desires.  They example I always give is:  One needs transportation, one wants a car and one desires a Porsche.  In America we tend to mow the lawn with a 747; we tend to over-buy our needs.  Teach your children perspective and to keep that perspective.  Congressman Sam Johnson said, "If we don't teach our kids the difference between an 'need' and a 'want' - Madison Avenue will."

I believe financial literacy is a life skill, just like reading, writing, good manners, and communication skills.  Teaching our children about the proper use of money will:

• Prepare them for unexpected events
• Prepare them for retirement
• Foster discipline
• Create more sense of delayed gratification in our instant gratification society
• Engender responsibility

Let me hear from you as your journey of teaching your children unfolds.