There are many young adults who go off on their own to college and find that they are lost in handling their financial matters. In order to raise money savvy children, the teaching process needs to begin early. Children need to learn several principles of sensible money management in order to have a good financial I.Q.
There are several pit-falls that parents should avoid during the teaching years
1. Don't control the money
When giving an allowance, allow your children to determine how to spend their own money - even if they suffer a few mild consequences for their choices. Children should be allowed to make mistakes. If they decide to spend all of their money on frivolous items, the consequence for this action should be their own.
A parent can point out, If you had saved your money, you would be able to buy (insert latest fad item). Oh well, maybe next time!This can be followed up with, Would you like some help planning for the next time so that this does not happen again?
There is no need to drill this into your child's head, in most cases, a casual mention and follow-up with an offer for help is all it will take. Most children learn this lesson quite easily, with no need for repeated reminders or experiences. It is far better that they learn this at a young age than as adults.
2. Don't be the bank
When children run out of spending money, let them live on the skinny for a few days. They are not going to be put out in the cold or starve. You have those things handled. The lessons learned during lean times may come to serve them well and motivate them to set some money aside for a rainy day.
3. Don't forget to teach
If you do step in for a worthwhile loan, use the opportunity to teach repayment of debt
If your child needs a loan and you determine that they are credit worthy, ask them for a repayment schedule and hold them to it. They will learn the feeling of being in debt and the importance of meeting their financial obligations. This is a better lesson than simply explaining how credit works.
You can ask them for a small interest payment as well, so that they see how things are in the real world. This lesson is needed to show them the seriousness of being in debt to another party (even the family bank). And it helps them to develop the self discipline to repay their debts.
4. Don't stop paying an allowance
Be consistent in the amount of their allowance, even after your little entrepreneurs are earning for themselves.Children who are financially educated are more likely to take on outside opportunities to increase their income. When this happens, praise your child and continue with the allowance that they had before they began making their own money.
Remember that the purpose of their allowance is to teach them solid principles of financial responsibility. You need to continue to allow this growth, even after they are earning a little bit on their own. At this point, you can tell your child that you expect them to pitch in for the cell phone bill or added cost of car insurance.
Children need to learn financial responsibility. These lessons are better learned when they are young and the stakes are low. Remember to let your children make their own decisions when spending their money and allow them to suffer the consequences of bad choices. Take advantage of teaching moments and remain consistent when it comes to allowance.