There is unfortunately a significant lack of financial education in our country, which makes it more important than ever for parents to teach basic money lessons to their children.
Although some financial topics might seem challenging, you might be surprised what your children can absorb. From about age five, children can understand saving and spending, and as they get older they can learn more about budgeting and even investing.
To give you some examples, here are 12 money lessons your child can learn before age 12:
1. What it means to buy a stock.
Even a younger child can understand the concept of buying a stock. Explain to them that when they buy stock, they are buying a small portion of a company. If the company does well, they make money since they are a partial owner in the company. If it doesn’t do well, they could lose money. Sit with them and pick out a few companies they recognize and follow the stock from week to week to explain your point.
2. What it means to be greedy.
Most children can understand the feeling of greed, especially in terms of not wanting to share toys. However, they need to understand the consequences of greed. Explain to them what happens when one person hoards all the resources. Teach them to be giving instead of greedy.
3. How to donate wisely.
Your child is going to come across a lot of people who want them to donate their money. You can teach them how to research a cause or a company or how to be giving to a friend in need.
4. How to budget.
Budgeting is one of life’s most essential skills, right up there with learning how to do your own laundry and make a simple dinner. When you teach a child to budget, or better yet, have them learn from your budgeting skills, you will give them a lifetime of financial security.
5. What it means to pay taxes and fees.
Most older children will know what the word “taxes” means in theory, but you could always take it a step further by imposing your own tax. Also, I once knew a family who charged late fees if chores weren’t done on time. Their kids learned a valuable lesson and, of course, learned that people mean business when they threaten to impose fees.
6. How to save for large purchases.
In a world where adults are frequently offered 0 percent store cards so they can make large purchases right when they want them, it’s important to teach your children how to save for large purchases. Not only will it give them time to decide if it’s something they really want, but they can get the satisfaction of paying for something that they worked so hard to save for.
7. What it means to be in debt.
I remember my mother telling me that debt is a fact of life, but I’ve come to realize that there are many people and families who operate entirely debt-free. It’s my goal to also be debt free someday, and I want my children to know that’s the real way to experience a life of financial freedom.
8. How to track your spending.
One of the quickest ways to learn how to manage money is simply to know where it’s going. If you give your child $5 but they don’t know where it went after a few days, it’s time to encourage them to keep track of what they spend. They can record it by hand or type it into their phones if they are old enough to have one.
9. Defining needs versus wants.
It’s a good exercise for everyone to go over what needs are versus what wants are. Talking to your child and asking them to point out which things in the house are needs or wants will help to reemphasize this.
10. How to buy used items.
Some people are against buying used, and if that’s you, that’s perfectly fine. Just teach your child that there is an option to buy used, whether it’s for clothes or iPhones.
11. The meaning of compound interest.
This is likely a lesson for older kids, but like buying stocks, it’s good preparation for future investing. You can teach them how to calculate compound interest and basically give the lesson that the earlier they invest, the better off they’ll be.
12. How to use credit wisely.
Teach your child how a credit card works or they might assume it constitutes free money. Let them know that whenever you swipe the card, you have to pay it off at the end of the month. Let them know that if you don’t pay it off, you will be charged interest, and if the payment is late, lots of fees. They should have an understanding of interest and fees from the lessons mentioned above, so it all comes full circle.
Ultimately, as a parent, teaching your children about money is probably one of the most important gifts you can ever give them. Smart money management will set them up for a lifetime of stability and freedom, and who doesn’t want that for their kids?