How to Teach Your Kids About Money: Part 2
According to a survey by JumpStart Coalition for Financial Literacy, Only 26% of 13-21 year-olds said that their parents taught them how to manage money. Yikes!
It shouldn't come as a surprise that, at MIT FCU, financial literacy is of paramount importance. That's the main reason we regularly host free financial education seminars and webinars and why we publish additional content on social media and here on our blog. In this 5-part blog series, we're diving deep into actionable steps and strategies you can use to get a leg up on teaching your kids to manage their money well. Let's get started.
Pay Themselves First.
Here's an all too familiar story for many people. It's Payday, and your paycheck conveniently finds its way into your bank account via direct deposit. So first, the weekly money comes out - groceries, a trip to Target, some new clothes, maybe a tank of gas. Next, the bills come out - rent/mortgage, car payments, utilities, Netflix, etc. Then there are various Amazon purchases; a few random subscriptions to things you don't even recognize on your statement; maybe pizza for Friday night dinner; a few bucks to your oldest kid to buy a new video game; and who knows what else!
How about savings? How much will be put aside for your next vacation, car, or even an emergency fund? Unfortunately, the answer for many people is "Whatever's leftover," which is often ZERO! Ouch. That's not how you build wealth!
A better approach is to "Pay Yourself First." Before any of the expenses come out, you take your savings cut off the top. Then you pay for your expenses with "whatever's leftover." Now, I know it's not always that simple. And sometimes, there's not a lot of wiggle room in family budgets. But in the example above, you can see a few areas where long-term savings and investments (or paying off high-interest debts if that's where you are) should come out on top instead of as an after-thought. If you've got to cut something out, cut out the pizza, the random subscriptions, the video game, or some of the various Amazon purchases - not your long-term savings. Establish and maintain that habit, and eventually, you won't have to cut those things out! And getting your kids in the habit of paying themselves first will make for a very different financial life later on.
Here's how to do that:
As soon as your kids receive income of any kind - allowance, babysitting, birthday, etc. - have them 'process it' into clear jars so they can see the progress. Here's what I mean:
Many people advocate for the three-jar system to help your kids allocate their funds for different things. Typically, they'll have a Giving, a Saving, and a Spending jar. Envelopes, old coffee cans, cigar boxes, or any container can work. The clear jar allows your child to see the results of their money management efforts. In addition to the three jars mentioned above, there's another jar you should consider adding to the mix: The Wealth Jar, aka the Investing Jar.
Teaching your kids early on about growing their wealth could have a profound impact on their life. Many parents put most of their emphasis on their kids having a successful career. And that starts with good grades in school so that you can get into a good college to get a good job one day. That's all well and good. Learning how to succeed in school and ultimately land that dream job is fine advice. But I do wish that my parents instilled saving and investing habits when I was a kid. If only they taught me how to leverage the incredible power of compound interest when I got my first job delivering papers at 13! The truth is, if you teach your children how to manage money, tap into the power of compound interest, and if they start early enough, they can have tremendous financial flexibility later in life, whether they want to become a tech entrepreneur, an engineer, or an abstract painter, read: bartender.
So, the first jar they deposit money into is the wealth jar. This might be 10, 20, or 30%. However much you choose, it's meant to grow and potentially become a stream of income one day. Any interest earned can/should be 100% reinvested for a long, long time. This jar should periodically get deposited into a 529 education fund, an index fund, a share certificate, or whatever investment vehicle you choose. The more you know about investment strategy, the more you can teach them here. If you're new to the game, we recommend speaking with an investment advisor. Either way, your child should be part of that process and should also watch their money grow on 'paper.' You can illustrate this for them too by saying, "remember when your jar was full, and it had about $20 in it? So this 300 dollars you have in your fund is equal to about 15 full jars!!! Wow, good job, kiddo!"
Then Give to Others.
Okay, they've deposited a chunk of their funds into the wealth jar, and they've taken one step forward towards financial independence. Next, 20% goes into the 'giving jar.' There are several reasons to do this. Some financial 'gurus' claim that the more money you give, the more easily money flows to you. I'm pretty sure there's no science to back that up but teaching your kids to be generous and charitable sure seems like a good idea! Plus, there are a lot of young adults out there whose parents encouraged them to rack up six figures in student debt while also failing to mention anything about compound interest - they could probably use a little bit of your daughter or son's charity:)
Here are a few tips for giving to charity.
Set some goals or rules for this jar. For example, you might place a threshold of $20. Or perhaps your child wants to give to a specific charity and donate a certain amount, like $50. Once a threshold/goal is met, it's time to donate.
Do this in person if possible. For one thing, they can learn and practice doing basic banking transactions, interacting with a teller, using an ATM, etc. Then, physically take them and their money down to the bank and deposit it in their account. If they're old enough to have a checking account, have them write a check themselves. Again, good practice of the basics. If they don't, transfer the money to your checking account and show them how to write the check.
Once the banking part is taken care of, it's time to donate. Again, if possible, visit the actual charity. Contributing to a charity via an online portal is excellent and dealing with online transactions is another skill your child will need to learn. But it's a bit abstract for a younger child and won't have the same impact as handing over the check in person to an actual smiling human.
In fact, for their first couple of charitable donations, you can try and steer them towards choosing something local with a physical location like the local food shelter, SPCA, salvation army, etc. Then, if possible, you might try for a twofer and see if there are any volunteer opportunities while you're there. So now you're teaching your child to be generous with their money and their time! Boom!
Finally, make a big deal out of it. Take pictures, post on social media, tell the family, etc., and tell your child how proud you are of them and how they're doing a noble thing by helping others in need.
Saving for All the Things
Next, it's time to start filling a savings jar. This one is for specific things that your child would like to buy - a video game, a toy, tickets to a concert. The idea is that, when they're adults, this jar and the related habit parlays itself into things like saving for a new car, a vacation, or holiday spending.
It's a great way to establish the habit of saving and also to practice delayed gratification, which is a very grown-up skill that many of us could be better about:)
The critical point here is to set a specific savings goal. At first, make it super easy to achieve. Set your child up for success. After they hit their mark a few times, gradually encourage them to set a higher, more significant target. Make it challenging but doable and slowly build from there.
If this is one of the first things they've ever saved for, it shouldn't take months to hit the goal. So a few days or a week or two might be an appropriate timeline at this point.
Maybe they do daily chores for a few days, earn $10 or whatever your arrangement is, and then head over to Amazon to purchase a small toy or book that they've been eyeing. It might not seem like a big deal, but to a young kid, making a purchase with their own money is one of the most empowering and grown-up things they can do.
But next, help them stretch and save for something bigger. Maybe a $10 puzzle, or stuffed animal, or whatever it might be.
Over time, try to get them to save for more important things that take longer to save for - perhaps a new bike, a nice pair of headphones, a fancy pair of shoes, etc.
Even better if you can get them to save up to buy Grammy a special present for her birthday! Thus teaching them to give and to save up to do it better! But no matter what they choose to purchase, congratulate them and communicate how proud you are and how impressive it is that they saved up and hit their goal!
Time for A Shopping Spree
Finally, we come to the fourth jar, the discretionary spending jar. Aka, the fun jar!
After investing, saving, and giving, whatever is leftover in this jar is for your child to do with as they please. Technically, they can spend with absolute abandon. This jar is to splurge, have fun, and buy whatever tickles their fancy. But, of course, you could also encourage your child to spend judiciously. And if your child wants to put more into one of the other jars, encourage that too!
So they've got this money burning a hole in their pocket. Now is an excellent time to discuss opportunity costs. Try to be involved here and coach them on their purchasing decision. Explain that if they impulse buy this candy bar/dress/toy that they may or may not need or want, they won't have money to spend on treats and games at the school fair on Saturday, for example. If they buy 'this,' they won't be able to buy 'that.'
This all might sound intense, but as parents, our job is not only to be cool and let our kids do whatever their childish impulses draw them towards. It's to set them up for success in life. While money may not be able to buy happiness, it sure makes everything a lot easier. And knowing how to manage money means your kids will probably have more money to work with.
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