How to Give Your Children a Solid Financial Education

As a parent, one of your responsibilities is to give your children a financial education. Start teaching your children about money as soon as they are able to identify coins and bills. The earlier you start and the more you teach, the more likely they will be able to manage their money wisely by the time they leave the house. Here are some tips about how to give your children a solid financial education.

Use Cash

For younger kids, using cash exclusively helps them to see the transfer of money and understand that most things in life require money, which has a limited supply. When you go shopping, show the child how much money you have for the trip and use a calculator to help you stay within your budget. The child can begin to understand that you have to make trade-offs and go without certain things because you don't have enough money for everything. Plus, using cash is a wise habit to teach children because it only allows them to spend money that they actually have.

Give Allowance

Rather than using a child's allowance as a handout for buying candy, use his allowance to teach him what it is like to have a paycheck. Help your child allocate his weekly allowance between giving to charitable causes, saving for long-term goals (like college), and spending on short-term desires. Set expectations for what your child will have to buy with his allowance. For example, you might give him a few small gifts of toys at Christmas and his birthday, but require him to use his allowance to buy any other toys he wants during the year. For teens, you can give a slightly larger allowance and require that the teen buy all of her clothes with the allowance money so she can learn about the cost of clothing. With an older teen, rather than increasing her allowance, have her get a part-time job to fund her spending.

Use a Bank Account

Some kids see an ATM as a place where adults go to get free money. Get your teen his own bank account to help him understand that the bank is a place that keeps his money and gives it back to him when he asks for it. Help your child manage an account ledger to keep track of how much money is in his account at an given point in time so he understands that when he goes to the bank, that is the maximum amount of money he can get from it.

Teach About Interest

One of the most difficult financial concepts for children to understand is the cost of borrowing. College students often take out loans without thinking much about the financial repercussions, in addition to racking up several thousand dollars of credit card debt before graduating. Educate your children about how interest works to help them better evaluate when it is worthwhile to borrow money. For example, use a student loan calculator to create an amortization schedule for a typical student loan. Let the child see how much of each payment is interest and how little the balance decreases at first. Make schedules with different repayment terms to show the benefits of paying off debt quickly. You can also let your child see your credit card bills and teach them the difference between paying the minimum and paying the balance in full.