A recent study has shown that by age seven, children are “capable of grasping the value of money, delaying gratification and understanding that some choices are irreversible or will cause them problems in the future.” But despite their ability to understand essential financial management and planning concepts from a young age, according to Youth.gov, high school seniors scored an average of 48% in a recent financial literacy exam, “showing a strong need for more comprehensive financial education for youth...” Although the state of Illinois has required financial literacy courses in public schools since 2017, this training doesn’t start until their final year, leaving the prime early years for developing these skills untouched.
That’s why it’s so crucial for parents to do their part to make sure they are prioritizing teaching financial literacy to their kids. And while public schools may develop an extensive and well-researched curriculum for their students, it doesn't have to be complicated or time consuming for you to get started. Simply showing them your own basic budgeting strategies, leading by example, and encouraging good saving and spending habits along the way, can make a major difference in their long-term financial outlook. In this post we’ll highlight some of these simple practices you can do with your children of any age to give them a solid financial foundation to help them prosper for years to come!
Teach Them About Wants vs. Needs
You’ve probably already had some hostage-level negotiations with your child at some point, maybe while shopping or watching television commercials, about the difference between wanting something and needing to have something. You might have even used it as an opportunity to teach them to work towards a goal (“If you sleep in your own bed for a week you can earn it as a reward!”). This rudimentary parenting lesson isn’t just useful in tempering the naturally demanding tendencies of children, it also is an important early financial literacy tool about first using your resources to address needs, as well as having to delay the gratification of getting something you want until you’ve earned it—even if that is indefinite.
Wants, are items that add enjoyment to your life, but you don’t necessarily need to live, and needs, which include basic necessities like food, shelter, clothing, and healthcare, are sometimes easy to distinguish. For example, you want a Disneyland trop, but need food. The difficult lesson lies in the gray areas: you are hungry, and you want a cookie, but you don’t need a cookie, and it might not be the best choice for your body. As Very Well Family explains, “This dichotomy is a very tricky point for kids and teens to understand.”
So how do you teach the difference between the two? In their guide, “How to Teach Kids the Difference Between Needs vs. Wants When It Comes to Money,” Parents.com has two great suggestions. First, when responding to an unrealistic demand from your child, be compassionate but firm, when you say no. Additionally, they argue that it’s key to set time aside to incorporate your children in family budgeting to help them gain an insight into your own decision-making regarding wants and needs
Include Children in Your Financial Planning
Considering wants and needs is a significant aspect of financial planning. During your budgeting time, explain to your children the primary “needs” expenditures that your family will face in the upcoming month, and how everyone’s “wants” have to fit into the remaining dollar amount.
Then include them when you make decisions about how to allocate your family’s discretionary funds .
Should you plan a fun trip together? Purchase season passes to a local attraction? Or maybe buy a new television? If they feel included in the process, it becomes easier for them to understand why you can’t purchase a specific item the next time you go to the store together.
As Robert Phelan, Certified Financial Education Instructor, explains "you are communicating there is a plan for how you spend money as a family, the plan supports what everyone wants to do and agreed to support, and this new want wasn't part of the spending plan.” Ultimately, disappointment about not getting a “want” fulfilled may feel less like a betrayal, and they can begin to see the practical side of spending and saving.
Show Your Young Kids How to Create Their Own Budget
Beyond simply giving your children insight into your family budget, it’s equally vital that they can organize their spending habits. And most children have their own money, whether it’s a few dollars from grandma or cash earned from chores. Once you have explained the basic concepts of your family budget to them, help them create their own.
Younger children with small amounts of gift or chore money might do well to practice a simple rule of financial management: 50% for wants, 50% for long-term savings. You can add basic math lessons to the mix by keeping two jars and dividing their money in half as an easy and highly-visual way to organize the system. Regularly, sit down together, count the money in their “wants” jar, and come up with a plan on how they might choose to spend it. As your child gets older, couple your regular budget assessments with a trip to the bank to deposit those savings into an account (more on this below!).
If your child receives more considerable amounts of gift money, you might wish to adjust the ratio, or use a different 50/50 rule. For example, you could require that all gifts over $50 are for long-term savings, but all gifts under $50 are for spending on whatever they like (within reason!).
Make Sure Their Budget Grows with Them
As your child gets older and hits their teenage years, they will likely have access to more money through chores, larger allowances, or part-time jobs. At this age, it might be time to adopt the standard 50/30/20 rule of budgeting, which adds “needs” into the mix.
With this budgeting system, 50% of income goes to those needs, 30% goes to wants, and the remaining 20% goes to savings. Needs could include transportation (buying a car, contributing to insurance premiums, repairs, and gas), clothing (especially outside of back-to-school and holiday seasons), and phone costs (buying a phone or chipping in on the family monthly plan).
If your child has larger savings goals—like setting aside money for college—you may want to change that breakdown or swap savings and needs. Most importantly, they have a set strategy for allocating their money.
Set Savings Goals to Work Toward
In the last sections we talked quite a bit about savings in generic terms. While simply enforcing a broad savings rule has the benefit in setting up a habit, it can also be valuable and impactful to create specific savings goals for your child. According to Psychology Today, helping your child to set goals and save are some of the best ways to teach your child delayed gratification.
Start with shorter goals and smaller dollar values. When they’re younger, these goals will likely revolve around toys and entertainment—and that’s okay, as long as you stick to the needs vs. wants framework. Discuss the price of everyday items they might like to purchase and calculate how long it will take to gather enough money to pay for them. This is also a great time to talk about making wise spending choices—like finding a Lego set used on eBay vs. paying the total retail price at Walmart. And when they finally reach their goal, celebrate with them and make the time to help them get their desired item.
An important note: money used for certain goals, especially short-term ones, doesn’t need to come from your child’s “savings” pot. For instance, if your elementary-aged child wants a new video game, they can gradually build the money up in their “wants” jar until they reach enough to purchase it. Instead of letting your child steal their savings, explain the difference between long-term savings (more on this below!) and setting aside money for short-term goals or purchases that don’t add significant value to their life. One kind of savings shows how to build a nest egg and plan for major life goals, while one teaches delayed gratification—essential but totally different lessons.
Help Them Plan Long-Term Financial Goals
With age, encourage your kids to set their sights higher than entertainment and disposable goods. Consider asking them to contribute to purchasing their first vehicle or have them start saving for college expenses. By their teenage years, kids should be more adept at making and sticking to long-term goals.
As Stanford Children’s Health explains, it’s not until a child even reaches adolescence that they really “begin to think long-term,” and can “make his or her own plans” and “consider possible future goals.” Use this time in their development to help them to not only grow conscientious spending and saving habits but also give them a leg-up when they head out on their own.
Take Your Child to the Bank
As Forbes Advisor writes, “Just as important as the lessons you teach your kids about money are the ways you discuss and handle money when you’re around them.” In the same way that taking your children shopping models how you prioritize spending your hard-earned money, bringing them to the bank helps them model your good savings habits. It shows them how important making an effort for money management is to you. And they might even get a lollipop out of it!
Keep in mind that younger children learn best by engaging the senses. The experience of stepping into a bank branch might make the abstract concept of managing money that much more natural to them, instead of simply seeing you check your account balance on your phone or explain your budget on a sheet of paper.
Help Your Child Open a Savings Account
As they get older, you can also help them open their own savings account that they can use to safely deposit the money they’ve been setting aside. While you can open an account with your child at any age, opening a new bank account when they are old enough to follow along with the process can be a valuable practical lesson. And many banks even offer special youth savings accounts. Make an effort to take them to the bank any time they have a significant deposit, and work with them to fill out their deposit slip with the amount of deposit and their account number. Finally, regularly help them scrutinize their statements, whether online or on paper, and watch their savings grow!
Teach Them About Compounding Interest
As their income starts to accumulate or they begin to work towards long-term goals like saving for college, guide them toward savings products with higher interest rates, including certificates of deposit (CDs) and 529 education accounts, like Illinois’s Brightstart plan. Use invester.gov’s Compound Interest Calculator or share this tutorial from Easy Peasy Finance to demonstrate how these accounts’ compounding interest can boost their savings significantly over time.
Introduce Your Children to Online Banking
Taking your child to brick-and-mortar bank locations allows them to become familiar with many common financial transactions and feel comfortable in the bank setting. However, as banking increasingly moves from in-person to online, it would do your child a disservice to stop at branch visits. Most accounts offer some form of online banking.
Help your child login (their minor accounts may be linked to your own, making this easy to do), and show them how to view their activity. Using our Consumer eBanking, you can also give them a quick lesson on other things they can do online, like transfer funds between accounts, pay bills, and view past statements. You can even help them to open a new bank account online!
Help Older Kids Use Smartphones to Manage Their Money
When your children get older, the next step in helping them manage their finances is to assist them in getting their phones set up for mobile banking. Help them set up text message alerts and download their mobile banking app to access their account information at any time quickly. Don’t forget to have them check out our digital banking tutorials to help explain the process!
You can also encourage them to take advantage of useful third party budgeting apps to add an additional layer of financial management to their repertoire. Apps like the ones recommended here, can be handy tools for teens who are already hooked on their phones. Some, like Mint, even link to their bank accounts so their spending goals and actual spending habits can sync up in real-time.
Learn the Basics of Banking and Finances with First Bankers Trust
At First Bankers Trust Company we’ve been working with generations of West-Central Illinois families to meet all their banking needs, from opening first bank accounts to choosing the right mortgage. We’d love to help you introduce your children to innovative money management. Ready to get started with us? We’re proud to offer one of the best savings accounts around with a low minimum balance and unlimited deposits. Visit us at one of our locations in Quincy, Macomb, and Springfield, Illinois with your child to open their own savings account today!