How to help kids establish good financial habits

Establishing good financial habits at a young age can set your kids up for success in adulthood. Learning skills such as budgeting, saving, and earning money is often challenging but vital for building good financial habits. Teaching these skills to your children can feel overwhelming, so we've come up with some ideas to help you get started.

Start with the basics

While many children learn the basics of money in school, applying these concepts in the real world can be challenging, especially since most transactions are digital. Physical currency, like coins and bills, is a tangible teaching tool that can simplify these abstract concepts for young learners. Children can observe and learn firsthand how to manage and pay with physical money by engaging in real-life activities involving cash transactions, such as dining out as a family. This approach teaches the process of paying a bill and reinforces the value of money in a practical context.

Another effective and engaging method of building these financial skills economically is through board games like Monopoly. These games provide an environment where children can practice monetary transactions, observe the outcomes, and learn valuable lessons in a low-stakes setting.

Encourage saving

Developing the habit of saving money from an early age sets the foundation for financial responsibility later in life. A great way to begin teaching children about saving is by collaborating with them to define their savings goals. Understanding what they are saving for—be it a new toy, a book, or even a contribution towards a family outing—helps to personalize the saving process and makes it more tangible and fun for them.

Once they have a savings goal in mind, ensure there is a designated place for them to store their money, such as a traditional piggy bank or opening a savings account in their name. A savings account provides a secure place to keep their money and introduces them to basic banking concepts and the value of earning interest over time.

Emphasize the importance of budgeting

Incorporating financial planning into family activities can be a great way to educate children on the importance of budgeting. Setting a family budget involves open conversations about the family’s finances, providing a great learning opportunity for children. Start by scheduling a family meeting dedicated to discussing the budget. This transparent approach allows you to outline the allocations for various categories, including what has been budgeted for your children's needs, such as back-to-school supplies, monthly educational materials, or costs associated with extracurricular activities.

Explaining the reasoning behind budget allocations is important. Children might not initially understand why certain decisions are made, but by illustrating the bigger picture in a way they can understand, such as the importance of saving for future college expenses or the need to have an emergency fund, they can begin to appreciate the rationale behind financial choices. This clarity can lead to a deeper understanding and acceptance of why certain wants may need to be postponed or adjusted in favor of more pressing needs.

You can also build upon this and involve your children in the budgeting process. This might include showing them how you plan the monthly finances or involving them in decisions about allocating funds for different expenses. To make this process more engaging, consider turning it into a game or a challenge where they get to make financial decisions within a set budget. This is a practical way to include them and foster a sense of responsibility for the family's financial well-being.

To make these concepts more relatable, you can create a visual representation of the budget, such as a pie chart or a simple spreadsheet. This can help children visualize how money is being distributed across different needs and wants. Encouraging questions and providing easy-to-understand answers will enhance their grasp of budgeting fundamentals.

Lead by example

Demonstrating financial responsibility in everyday situations provides children with a valuable, real-world guide. For instance, paying bills on time emphasizes the importance of meeting financial obligations and showcases how to avoid penalties. By engaging in these activities together, such as paying a bill online, you offer concrete demonstrations of responsible financial behavior.

In addition, making smart financial choices during shopping trips can reinforce these lessons by comparing prices, leveraging discounts, and assessing the necessity of each purchase to prevent impulsive buying. When you involve your children in these decisions, for example, by debating which item offers better value during grocery shopping, you encourage the development of critical thinking and decision-making skills.

Financial experience

Being open about your financial journey is a vital educational tool. Sharing experiences of economic challenges, the valuable lessons learned, and the strategies used to overcome them offer relatable and tangible teaching moments for your children. It also provides you with the opportunity to discuss the consequences of neglecting financial principles. Illustrating the potential outcomes, such as the accumulation of debt due to overspending or the stress that comes with unmet financial obligations, emphasizes the value of financial discipline.

It is equally as important to share your financial successes. Celebrating milestones like paying off a debt or hitting a savings goal shows the benefits of being financially responsible.

Let's review

Teaching your children how to be financially responsible involves setting a positive example, having transparent conversations about financial basics, and creating a culture where financial literacy is a priority. By actively participating in these practices from an early age, you equip your children with the tools to manage their finances effectively and lay the groundwork for their future financial success.

This article is for educational purposes only and is not intended to be financial, investment, legal, or tax, advice. Always consult a qualified professional about your personal situation.