Parents have arguably the most difficult job on the planet. Molding your children into high-functioning, independent beings takes more effort than simply teaching proper manners. The saying “actions speak louder than words” applies to some parenting duties – politeness, for example – but many valuable lessons must be presented to your kids through honest conversation.

Unfortunately, financial conversations can often feel quite uncomfortable. In fact, 71% of parents have some degree of reluctance to discuss financial matters with their kids, but failure to have meaningful money conversations with them leaves them to learn from your actions alone, which are not always totally transparent to them, and can be easily misunderstood. Therefore, it is important to breach any awkward barriers that exist and have honest conversations about money with your kids. The topic could be lessons in family budgeting, creating a sense of financial teamwork, differentiating between needs and wants, or saving for “long-term” purchases. Use these tips to begin establishing healthy financial habits in your kids.

Include your Children in Creating a Family Budget

Create a sense of teamwork around a monthly budget by including your kids in the making of a family spending plan. Regardless of financial situation, creating a budget is a good smart-money practice for all families and a simple way to demonstrate that money takes planning. Making your kids aware of the family’s monthly financial responsibilities – from paying for the electricity that powers the house, paying for internet service that allows the kids to play their video games or stream YouTube, to deducting money owed to the government in taxes – will help them appreciate the material things that they enjoy on a daily basis.

Of course, the family budget that you outline with your kids need not include the full financial picture. The point is not to shock them with adult reality, so a watered-down version of the real family budget will suffice for the lesson. Nonetheless, kids need to understand that it is not OK to have a hands-off approach to money. Creating a family budget will show them how to be proactive about balancing income and expenses, and form a greater sense of family teamwork when budgeting goals are met.

Differentiating Between “Needs” and “Wants”

A necessary conjunction to the budgeting lesson is making sure your children can differentiate between financial needs and selfish wants. The team spirit fostered in creating a family budget can be applied to this lesson. By making your kids aware of the family’s needs, outlined in a budget, you can begin differentiating the purchases that are necessary for the household to function from the purchases that are mere desires.

When kids understand and appreciate the financial priorities of the household, they may demonstrate a willingness to forgo a daily afternoon snack from the convenience store in order to save up for one of their “wants” at the end of the month. To make the lesson more explicit, include a list of “wants” for each child on the family budget to serve as a goal that rewards smart money management on behalf of your kids. This way, kids will feel invested in meeting the family’s “needs” list and understand money priorities. Reward their good savings behavior with an appropriately sized prize – their “want” – at the end of the month, e.g., a new video game or a trip to the arcade. Teaching your kids to delay their gratification for a “long-term” reward will help them learn to budget and save for items they really want in the future.

Reinforce Ideas About Money During Day-To-Day Activities

Trips to the grocery store, the bank, or a restaurant all contain valuable lessons about healthy money practices. Turn your day-to-day errands into opportunities for learning about money with your kids.

To demonstrate that purchasing decisions are often a question of trade off, give your child $10 to spend on anything they want during your next visit to the grocery store. Explain that they can buy whatever items they wish, but they cannot exceed their $10 budget. Practice the mathematics scenarios with them in the car before arriving: they can buy five items for $2 each, two items for $5 each, or one item for $10 – whatever their desired combination, the math must not add to more than their budget. This exercise teaches choice-making, reinforces ideas of money being a finite object, conveys the idea of everyday items having a dollar value, and that they are ultimately responsible for the items they wish to own…if they can make the math work.

Provide Your Children an Allowance

An allowance is a great means for parents to teach several important money lessons. There are different approaches to allowances, but they should only be done if it is possible in your family budget.

Some families prefer to make their children work for their allowance by performing household chores – loading the dishwasher, mowing the lawn, raking the leaves in autumn or shoveling the snow in winter. Making your children perform a chore in order to be eligible for money compensation teaches them basic lessons in wages and earning your money through labor and jobs. Here, a parent can explain that they, too, must labor for their money by going to work.

Once your child is the owner of their personal money, reinforce the idea that they are able to spend it on anything they want. But, if there is a bigger purchase they have in mind, they will have to save “long-term” or perform more chores in order to come up with the money.

Conclusion

While many parents find the topic of money difficult to discuss with their children, avoiding valuable conversations and lessons about financial matters can send the wrong signals to children. Passing on a healthy understanding of money matters is important for your child to grow into a financially responsible young adult. By including your children in family budgeting, providing an allowance for household chores, and explaining ideas about financial tradeoff, you are taking a positive first step toward creating a healthy financial disposition in your children.

 

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Crystal Cox, CFP®, CRPC®

Crystal is a wealth advisor in our Madison, Wisconsin office.