Here Are 8 Things You Must Teach Your Children About Finance And Debt

If there is one thing that neither schools nor parents teach their children, it is financial literacy. With no clue about managing their finances or debt, your children would invariably head into a financial crisis when they become adults. So what do you do as a parent?

The best way out is to take responsibility for your child’s financial literacy and make sure they understand the basics of money. Thankfully, there are some simple strategies you need to follow to educate your child in financial matters.

8 Things Your Child Should Know About Finance And Debt

Like any other skill you want to teach your child, you need to be patient in your approach. Here are the eight things that you should teach your child:

Budgeting

The biggest reason why anyone falls into a debt trap is the lack of budgeting. If you don’t know what you earn and spend, you end up overspending and borrowing to pay your bills. A detailed list of expenses is the first step for a budget.

A well-documented budget ensures you know where every penny is coming from and where it is going. This will help you cut out unnecessary expenditures and go from being a borrower to a saver. Now let us replicate this concept for your child.

Your child could start with saving up for their birthdays or those of their siblings. They can budget what they spend when they are out with friends.

Let your child decide how they want to spend their pocket money, including saving, charity, or for something they want to buy. When they run out of money, they learn the importance of budgeting.

Credit Cards

When your lifestyle is supported by borrowed money, your debt starts building up. This is what happens when you don’t understand how credit cards work. These products encourage you to pay a small percentage and postpone the remaining dues.

Knowing how to use your credit is essential. You should have the savings or the income to pay the dues within the billing cycle. Show your child using a calculator how debt builds up to a mindboggling amount with high-interest rates and compounding.

An effective way of teaching your children about credit cards is to take them shopping with an expired credit card. Ask them to add what they want to the card and check how much cash they have.

Help them understand the importance of a good credit rating by giving them extra cash for sticking to their budget.

Debit Cards

Unlike credit cards, debit cards allow you to spend what you have. Teach your children about these products by saying that their spending limit is restricted to their pocket money. They should know that what they have in their bank and what they can spend using their debit card is the same.

Give your children a square white card and let them write down how much balance they have in it. When they use this card for getting things from you, deduct the value of each item and let them know the balance left. Your child will understand that with debit cards, they cannot spend what they don’t have.

Starting An Emergency Fund

As an adult, you would know that emergencies strike without warning and the importance of having an emergency fund. You need to teach your child that a part of their weekly allowance should be left untouched. They can use it only when something essential is required like shoes that are worn out or if their computer breaks down.

They should also know that the emergency fund needs to be replenished. Without an emergency fund, you either liquidate savings meant for your financial goals or end up in debt by borrowing at high rates regularly.

Identifying Needs And Wants

Knowing the difference between your needs and wants is essential for financial freedom. Your needs are your priorities, and wants are addressed after that. You should teach your children that their earnings should be used for their expenses first and then for an outing with friends.

Ask your children to make two lists, one containing essentials and the other non-essentials. You need to guide them here since items they include in the essentials list are mostly things they would not require for survival. When you take them for shopping, use these lists so that your child identifies and selects items they need.

Just as your spending habits are essential for improving your credit score, so are the habits of your children. Teach them about credit scores in an entertaining way. When they spend smartly, give them a high credit score and discounts on what they buy as an incentive.

Having A Financial Goal

Whether it is becoming debt-free, savings for retirement, or a dream home, all adults are driven by financial goals. Just as you save and invest for a financial goal, teach your child to do the same. Help your child set a financial goal for a big-ticket item they want like a tablet.

Your child should learn how much they need to save every week to buy the item. Offer them options to earn extra money and reduce their spending in other areas to save more. Let them take their time, but it will be a lesson they won’t forget.

Investing in Stocks

If you have profited from stocks, you would know how important they are for your financial health. Children too need to learn what stocks are and how they can benefit from them. They also need to understand the risks associated with stocks.

Children enjoy activities with their parents, so sit down with your child and study companies together. Monitor stocks together and help them understand why stocks fare well or poorly. When your stock does well, celebrate the success with your child.

Importance of Net Worth

Your child should know their earnings, their expenses, what they own, and what they owe. When they are aware of the bigger picture, they will try to maximize their earnings and minimize their expenses. This will help them know what their financial situation is at any point in time.

Help your child draw up their balance sheet by writing down their assets and liabilities. When they find how important their net worth is and how they can increase it; it will motivate them to check their expenses and stay out of debt.

Gift Your Child Financial Freedom

The greatest gift you can give your child is financial freedom and debt-free life. They will have the edge over their peers and will be forever indebted to you.

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