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Sunday, February 15, 2009

Teaching Kids about Money for Life-Long Healthy Financial Habits

By Laura Nelson-Smith

Kids catch onto the importance of money in life pretty quickly as they watch us use it. The way to show your child the value of a dollar is by teaching them the different ways a dollar is used.

Begin When They're Young

Start showing your child at a young age how money works. It's imperative for kids to learn that money is something that is earned. They need to understand that the products or services we need in life are provided in exchange for money, and the value or worth of what is being sold is up to the seller to determine. There is no way to purchase an item or service when you don't have money

A follow-up to this is talking about saving money. A child with a couple dollars could go buy a piece of candy (that'll be gone in 10 seconds) or an inexpensive toy (that will be broken in 10 minutes or completely forgot about the next day). However, if that child decides to save those dollars, a better item can be purchased that may have more meaning and last longer.

Have A Savings Plan

One way to teach children about savings is setting a percentage they should save every time they earn money. Ten percent is an easy sum to learn; simply move the decimal point one space to the left. For every $1.00 earned, $0.10 will be saved ($23.48 earned, $2.34 saved).

This savings isn't for a better short-term item, but for a "rainy day" or even a car or college fund. The remaining $0.90 can be used for the candy or "better item" as mentioned above. This principle can teach the child self discipline for very long-term savings (i.e. a house or retirement when they're an adult).

It is a given that a six-year-old will not get the "rainy day" theory, and talking to them about the privilege of driving may not win brownie points; but after saving 10% over the years, they can see how it adds up. This is a valuable teaching for when they get their first job. They will be used to saving that 10% already

You can also share with them about putting some money to the side to give to a charity they are interested in. Concepts like this teach them even more about managing their money.

As Your Child Grows

When your child is more mature, take him or her to the bank with you and open a line of savings in their (and your) name. Once or twice a month, take your child to the bank so they can deposit their money into their account. Let them see the bank statement and watch how their money is growing with the help of interest.

It is a good idea for them to know that interest is a big part of saving and spending. With interest you either pay more or earn more; it all depends on what the interest is for. It is a good idea to show teenagers that if a debt is not paid for in 30 days, they will end up paying more for an item than the purchase price.

A good way to prove how unfavorable or great interest can be is by role-playing. Find an item your teenager wants to use a credit card to pay for. Create a chart showing how making only the paying the minimum changes what the total debt is, how long it will take to pay the debt off with minimum payments, and how much interest (or money lost), is paid in total.

Then you can take that same amount of months it will take to pay it off and compare the interest they pay with the interest they could earn if they save money for the item. While the interest earned won't be much, your goal is to show them that if they save money to purchase the item, they will only have to pay the cost of the item plus tax, but they won't pay any interest.

When children understand how money works they'll (hopefully) be more inclined to use responsibility when making money decisions.

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