**Guest post from Kristin Louis, founder of the blog, Parenting With Kris.
Financial literacy is important for a number of reasons, and teaching your kids smart money habits early on is one of the best things you can do to safeguard their financial future. The more your children know and understand about responsibly earning, saving, borrowing, investing, and spending money, the better able they’ll be to protect themselves from debt; save money for retirement; and budget for the purchase of a home, vehicle, and other big-ticket items.
Here are five tips to help you raise financially savvy children who grow up to be confident and financially responsible teens and adults.
1. First, Improve Your Financial Literacy
In order to teach your kids good money habits, it’s important to start by improving your own financial literacy. Read books and magazines on financial literacy topics, listen to podcasts such as Planet Money and Millennial Money, and look for financial literacy events in your community. You could also take a personal finance course on Udemy.com, Alison.com, Khan Academy, and other online learning platforms. Some courses are free, while others are paid.
2. Play Financial Literacy Games and Activities
Many games and activities have been designed to teach kids financial literacy as early as kindergarten. The Consumer Financial Protection Bureau is an excellent resource for parents, as they can find kid-friendly games and activities that explore topics such as making money, saving for purchases, paying bills, buying gifts for others, and understanding the difference between buying and borrowing. These activities can also help children to learn the difference between financial wants and needs.
Additionally, you and your kids could play board games that teach financial literacy and money management skills. Monopoly, Payday, the Game of Life, and Money Bags are just a few great options. Or if your child prefers video games, those such as The Sims, House Flipper, Animal Crossing, Stardew Valley, and Age of Empires can make learning about money fun and enjoyable at any age.
3. Give Your Kids an Allowance
Creating an allowance program is another great way to teach your kids about money, as giving an allowance can help your children to make smarter financial decisions and save for non-essential purchases like toys and video games. There are two main types of allowances to consider, according to Hannah Horvath of Policygenius:
- Chore-based allowances: To reward your children for completing their homework and helping out around the house, you could give them an incentive-based allowance that teaches the importance of hard work.
- Set allowances. Instead of rewarding your kids for the work they do, you could give them a set amount of money each month or week. This can help your child to learn how to budget and save for purchases, but it doesn’t teach them the importance of working for money.
Of course, there are other options for giving your kids an allowance. As another idea, you could combine the two methods above, giving your children a set allowance in addition to bonuses for other chores or work they’ve completed. You might also reward your kids for donating part of their allowance to a charitable organization of their choice.
4. Open a Savings Account for Your Children
In addition to improving your personal finance skills, playing financial literacy games and activities with your kids, and giving your children a weekly or monthly allowance, opening a savings account teaches your little ones several important skills early on. A savings account, for instance, teaches kids basic math skills and shows them how to deposit cash or checks and grow their savings with compound interest.
When opening a savings account for your child, don’t just focus on online banking. Introduce your child to online and in-person banking methods so she learns how to complete a deposit slip, withdraw money, and use an ATM. It’s also best to look for a high-yield savings account without maintenance fees and minimum account balances or deposits.
Some of the best savings accounts for children are available through Alliant Credit Union, Garden Savings FCU, and Northpointe Bank. Alliant Credit Union, for example, offers a high annual percentage yield (APY) of 0.55 percent on account balances of $100 or more, in addition to other benefits like a $5 opening deposit and the ability to connect a parent or legal guardian’s Alliant account with the child’s savings account.
You can also use the concept of saving as it pertains to launching a business. Personal savings is one of the most common sources for startup money, and many lessons can be learned when discussing business ownership with your kids, especially if they have an entrepreneurial bent. It’s possible to even do some hands-on instruction at this point; for example, the money in their account can be used to open their own lemonade stand. After all, someone has to buy the lemonade mix and markers for signage.
5. Teach Home Ownership Concepts Early On
Many renters worry they’ll never be able to achieve the American dream of homeownership. This is largely due to the high cost of making a down payment, unaffordable home prices in the buyer’s targeted area, and credit issues that prevent them from obtaining a mortgage. However, teaching kids about homeownership could help them to build wealth and achieve financial security later in life.
Here are a few homeownership concepts to teach your children:
- Housing affordability. Several factors determine your eligibility for a home mortgage, such as your household income, credit score, assets, and debt-to-income (DTI) ratio. Debt.org shares some tips for talking to your child about borrowing money and debt.
- Down payments. Talk to your child about the importance of saving for a down payment on a home, as larger down payments mean lower monthly payments and mortgage interest rates.
- Homeownership expenses. In addition to the cost of purchasing a house, explain to your child that other expenses of homeownership include homeowners insurance, property taxes, lawn care, maintenance, and in some cases, homeowners’ association (HOA) fees.
Financial Literacy Matters
All good parents want their children to succeed in life, and teaching your little ones financial literacy at a younger age can help them to understand the value of money and make smart financial decisions throughout the course of their lives. This will help them to save for the things they want and need in life, whether it’s a down payment on a home, a shiny new car, or the vacation of their dreams. Whatever it may be, financial literacy is the key to achieving these goals and reaching financial freedom.