Modeling good financial behavior isn’t something you mindfully consider until you realize the impact you might be having on the young minds in your home. Let’s admit it, parenting is a tough job, and it’s crucial to teach your children about the world, which includes managing money.
There are many ways you can make mistakes when it comes to teaching your kids about financial literacy. It’s far too easy to get into debt or waste money on frivolous things in an effort to keep up with the Joneses. On top of that, most parents don’t know how to properly educate their children about personal finance topics because they didn’t have these resources themselves growing up.
Starting at a young age, you can help your children:
- Have healthy savings habits
- Create opportunities to make money
- Make smart spending decisions
- Understand the value of giving
- Adopt sound financial behavior
Socionomics is the understanding of behavior finance and the various types of behavior financial bias. Learn how it affects your financial decisions from a financial advisor in Norman, OK.
What is emotional spending?
Emotional spending occurs when you buy things that are not necessary. It’s true that you have to afford shelter, food, and clothing for your family to survive, but most people spend money on items that are not in their best interest or do not help them achieve their financial goals. Here are some examples:
- You buy items that you don’t need because it makes you feel good when you purchase them
- You purchase clothes at clearance prices because the price is low and the item looks appealing at the time
- You eat out often because you enjoy socializing with friends over dinner or lunch versus cooking at home
Can you relate to any of the above, and then wonder where your money is going? Especially during a volatile market, it helps to have a family talk about where each family member can cut back in order to work as a team.
Teach your children the correct way to manage their money early in life.
When your children are young, talk to them about saving, spending, and giving money. Show them how fun it is to save up for something special by putting some of their allowance or birthday money each week into a piggy bank or savings account. Let them know that when they get older they will be able to use this savings for things like buying a car or going to college.
Teach your kids that there are times when it is okay to spend more, like when you go on vacation! But make sure they understand that sometimes when purchasing power reduces (during times of high inflation for example) you should be careful with your resources and stay thankful for what you have (always).
Teach them how to build credit eventually, and the importance of being responsible with credit cards and debit cards before they have one in hand. A credit card can help you build good credit history if used wisely – but only if you pay off the balance every month. If not, interest charges will begin adding up quickly making those small purchases look much larger over time.
This can lead to an expensive cycle where making minimum payments becomes impossible because all available funds are already allocated towards other monthly expenses such as rent/mortgage payments etc., leaving little room left over for groceries and gas.
Make your financial mistakes the first money-related lesson you teach your children.
If you’re trying to lead as an example for your kids, start by using your own mistakes as real-life lessons. Don’t let them think it’s okay not to make mistakes, because they’ll be disappointed when reality hits them. You can’t save your children from everything and they need to know how things work in the world.
It helps kids to see or hear about your mistakes so that they know it’s okay if something goes wrong and you don’t have all the answers. The best way to teach this is by letting your child witness an actual mistake, or admitting that while you made a mistake once (and survived) there are times when others might not be so lucky with their choices.
Read: Avoiding 7 Bad Money Decisions: A Look at Behavioral Finance Biases
Money can be an awkward topic for kids to talk about with parents.
- Don’t make it awkward.
- Keep it casual, fun, and not forced.
- Don’t make it a taboo subject.
- Don’t lecture your kids about money.
- When talking about money with your kids, remember that you’re trying to give them the tools they need to be financially successful later in life; this means that their relationship with money should be collaborative, not one-sided.
Get your kids involved in making financial decisions.
Children should be involved in the decision-making process. Parents should be transparent about their financial decisions and why they make them. This can have a powerful effect on children’s understanding of money and how to handle it well.
Once you start to show them the ropes, ask your children what they would do in different financial situations, or how they would handle simple financial decisions.
Practices for parents to set their children up for financial success.
The good news is that there are many things you can do to help your children avoid the same financial mistakes you made.
- Set a good example: Children who grow up in financially stable homes are more likely to achieve financial security as adults. If your child sees you spending money recklessly or making bad choices with money, they will follow suit.
- Create opportunities for earning income: It’s never too early for kids to start learning how valuable their time and skills are. Encourage them to find volunteer opportunities at school or at local organizations where they can earn money by helping others or doing chores like cleaning up after events or selling snacks at fairs, etc. You could even give them a small allowance if they show responsibility with it.
- Help kids make smart purchases: Even if your child doesn’t have cash of their own yet, it’s important for them to understand the value of saving up until he/she has enough saved up for something specific.
- Show kids how to shop around for the best prices on products or services. Give examples about how much things cost when purchased new vs used or explain why buying generic brands can help save money.
How can a financial checklist help parents?
Our financial parenting checklist can help you keep track of the progress you are making toward achieving your financial goals while teaching your kids to do the same. This can be done by reviewing the checklist at least once a week and then setting aside time to review it more thoroughly during a monthly financial review as a family unit.
For example, if one of your goals is to pay off your credit card debt, then each time you make a payment on one of those cards, write that down in the box under “Credit Card Payments.” This way, when looking at the overall picture at month’s end or year’s end, you will easily see where you are and how much further along or behind schedule you are compared with when first starting out with this goal. As you walk through these efforts as a family, your children will learn to adopt the same practices.
TRAC has financial solutions for families.
Your children are unique and will make their own mistakes. However, if you can lead by example, show them the right way to handle money, and give them a solid financial education from an early age, they will be much better prepared for success as adults.
Ask our team about making rational decisions in order to support your retirement planning efforts. Professional guidance from TRAC Advisor Group can help you avoid the pitfalls of the various types of behavioral biases.
Schedule a call or one-on-one meeting to learn more about what we do and how we can help you get ahead with tactical and alternative investment management. We look forward to working with you and your family for years to come.
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