Encourage hard work, saving and planning; teach kids about investing, budgets and giving; warn them about debt — and don't fix all their mistakes.My father emigrated from Taiwan in the 1960s with only $17 to his name
and the clothes on his back. Though he was poor in a material and
financial sense, he never considered himself poor. His mantra was that
financial wealth alone does not represent one's "true wealth."
My dad taught me not to define myself by how much I had, but by what I
did with what I had. I learned early on not to let money be the sole
determining factor for the decisions I made in life, but I also learned
that, although money couldn't buy happiness, it could provide peace of
mind, freedom and flexibility. I am thankful for the values my father
instilled in me about "true wealth," but I am also grateful that he
taught me about finances. My dad understood the importance of financial literacy and has left me a legacy that I am now passing on to my own three children.
Financial literacy is
having the knowledge necessary to manage personal finances efficiently.
Financially literate people know how to achieve long-term goals and make
healthy financial decisions.
On the other hand, those who are not financially literate have
difficulty applying financial decision-making skills to real-life
situations. Not only do they tend to make unhealthy money decisions that
create financial problems, they have trouble reaching financial
milestones. In America today, financial illiteracy has become an
epidemic. A study done by the Financial Industry Regulatory Authority
Foundation estimated that nearly two-thirds of Americans can't pass a
basic financial literacy test. That's a problem.
Whereas basic literacy is a priority for public educators, financial literacy is not.
Educators and pundits are still debating the part public schools and
universities should play in promoting financial literacy — and clearly,
it should be more than it is. Parents, however, do not have to wait to
begin fostering financial independence in their children at home.
Here are some things you can be doing right now to raise financially literate children.
1. Teach your children to work hard.
Children need to understand the correlation between work and earnings
from a young age. If your kids are actually doing the work they're
getting paid for, don't be apprehensive about paying them to work.
Rewards motivate children, and money is an attractive reward. Allowing
them to take on chores that they can get paid for not only teaches them
the value of hard work but helps them learn how to manage their money.
If they don't do their work, don't pay them.
You can also cultivate
their entrepreneurial spirit by encouraging them to offer babysitting,
pet care and yard work or housecleaning services to friends, neighbors
or relatives. Kids who work for pay can learn the cost in labor of an
impulse buy without monumental consequences. They can also learn the
satisfaction of working hard to build savings and achieve goals.
Children who understand the value of hard work learn to be responsible for what they produce.
2. Give your children vision. Financial planning
is about defining your personal goals and creating a realistic plan to
accomplish them. Discuss your family's financial objectives with your
children and let them see what you do to achieve them. Encourage them to
explore their own ambitions and aspirations for the future and set
personal financial goals.
Their plans and
objectives can and probably will change, but learning to implement both
long- and short-term goals allows them to taste success and enjoy the
fruit of good planning.
3. Help them learn to save. Helping your children
learn the value of regular and disciplined savings is a gift. As soon as
they are old enough to start filling up a piggy bank, they can begin
saving. When the piggy bank is full, set up a savings account and let
them manage their records so they can see how much they are saving over
time. This will be a valuable lesson during their teen years, when
they're tempted to spend savings meant for a car or college on food,
clothing and friends.
Children learn by doing. Help them create a workable budget that prioritizes savings but develops self-control.
Then teach them to save regularly and systematically by establishing a
timeline to reach specific goals. As they begin to experience the
benefits of savings firsthand, they will start saving on their own.
4. Talk to them about investing. Teaching your child the fundamentals of investing early
is a worthy investment in their financial literacy. It does not need to
be complicated. Even very young children can plant a seed and watch it
grow over time. Board games that teach about money provide excellent opportunities to show children how investing works. Kids can also see how compound interest works with a compound-interest calculator, which allows them to calculate how much even a small investment now can yield in profits over time.
You can introduce your
kids to basic but important concepts such as inflation, interest rates
and investing in companies they respect by merely talking with them
about what's happening in the economy.
5. Teach them to give. Children need to learn to
share, because they need to learn their stuff isn't what's most
important. Learning to give from what they earn not only teaches the
value of generosity but helps them see that making money is not the most
important thing in life.
Organizations such as World Vision offer a gift-giving catalog
that allows children to choose practical gifts such as chickens, goats
and clean water for children and families in other parts of the world.
Giving a portion of their allowance to the children's hospital
collection in the checkout line or donating to the Salvation Army at
Christmas provide opportunities for kids to discover what they value
most and support it in tangible ways.
6. Show them how to budget.
Teach your children that no matter how hard they work, it's unlikely
they will be able to save, invest or give without budgeting. Even young
children can learn to budget by distributing their allowance in jars
designated for long-term savings, short-term savings, giving and
spending. Older children can transition into a more detailed envelope
system and a written budget and eventually manage their budget through an app.
Budgeting helps kids learn how to save for what they want and need
without going into debt. The principles of budgeting can be taught from a
young age and sustained as a child grows into adolescence and
adulthood.
7. Warn them about debt. We live in a
consumer-driven culture. Even with a sound budget, debt can be hard to
avoid. Children need to understand the costs and implications associated
with debt so they can develop the self-control necessary to avoid bad debt
and use good debt wisely. Satisfying your child's impulse by buying
them what they want and justifying it by making them pay it back later
is not teaching them to handle debt; it's encouraging impulse buying.
Bad debt is anything that
depreciates. Open credit card balances and car payments are bad debt.
Traditionally, good debt is something that brings returns. Borrowing to
finance a home or college degree has long been considered good debt, but
times have changed. Americans currently owe more than $1.48 trillion in student-loan debt
spread out over 44 million borrowers. We are just now beginning to
recover from the sub-prime mortgage crisis that caused the 2008
financial crisis and subsequent Great Recession. Make sure your children
understand that even good debt costs. Help them learn to count the cost
and understand the obligations associated with debt.
8. Don't solve their problems for them.
Parents like to fix things for their kids. We don't like to see our
children suffer. Unfortunately, alleviating the pain associated with bad
financial decisions fosters financial ignorance, even if it's as simple
as fronting the money to your 10-year-old to buy the latest video game
after he nickeled-and-dimed away his allowance. Financially literate
children understand that poor spending habits have consequences.
Of course, to raise financially literate children, you need to endeavor to be financially literate yourself. Your willingness to raise your own financial IQ will not only set an example for your kids but will most likely improve your own financial situation.
Marguerita Cheng
CNBC contributor and CEO and cofounder of Blue Ocean Global Wealth
Please Visit: https://moneyvalue.ca
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