Talking about money is hard. So many discussions lead to embarrassment, arguments, or even shame. But when it comes to our kids, talking about spending and saving early and often is a key component to setting them on the path to financial independence.
For many parents, it’s hard to know where and when to begin. Fortunately, there’s no end to tools and support for parents to help kids understand personal finances, learn strategies for short-term savings, and plan for the future.
Needs Versus Wants
According to experts like Al DiFranco, president and CEO of Junior Achievement of Greater Cleveland, parents should start young kids off with learning the difference between needs and wants.
“At Junior Achievement, we start promoting financial literacy in kindergarten by talking to young people about the difference between needs and wants,” DiFranco says. “We have flashcards we use in classrooms where we talk about basic needs like food, clothing, and shelter, and compare that with wants like toys and electronics.”
He suggests parents continue these conversations by making similar tools, or simply by having honest conversations. This can also help as kids grow older and begin to understand financial inequity, or struggle with why they can’t have a certain brand name or electronics their friends have.
Honesty in these conversations is important. He says helping young people learn the differences between needs and wants at an early age can really make an impact later in life.
“It’s OK to want things, and it’s also OK to say no when a child wants something,” he says. “If you can give a reason why that is the answer it will probably be much easier to understand for a child. The more authentic that reason is, the more likely it will resonate with them and help them along on their personal finance journey.”
Mastering Short-Term Saving and Responsible Spending
Understanding the distinction between needs and wants is foundational to so many aspects of financial literacy, especially when it comes to short-term savings and spending responsibly. Teaching kids how to save up for an item they really want can boost confidence, and help them to understand how impulse spending can get in the way of what they really want.
Let’s face it, saving for the future can be deeply unsatisfying, especially when there are so many tempting ways to spend money now. Allowing kids to spend some money in the short-term while teaching them to save for a more secure future is a difficult balancing act, but there are tools to help.
One low tech strategy is the spend, save, share technique. Using envelopes, or small banks easily found through retailers, kids divide any money they earn or are given into these three categories. The “spend” envelope is used to save up for items they want like toys, games, or going out with friends. The “save” envelope is specifically earmarked for long-term savings like college, a car, or investment. At the end of the year, or when they reach a certain goal, kids can donate their “share” pile to a cause or charity of their choosing.
Giving kids independence when it comes to spending is a scary but important step. Building guidelines and providing oversight helps kids make smarter choices.
Andrew Lamb, a financial advisor with W3 Wealth Management, sees value in utilizing debit accounts many banks offer specifically for kids and teens.
“I believe these are great tools for children to start learning about the value of money and savings,” he says.
He notes it’s important to look for options that provide overdraft protection as this can significantly impact a parent’s finances. Many accounts also allow parents to monitor their child’s spending, set limits on certain categories like toys or restaurants, or can be set up so kids request money from parents that they can approve or deny.
He suggests, “looking for a bank that is easy for parental viewing, low to zero annual fee and no transaction cost.”
Planning for the Future
When it comes to long-term savings, involving children in both decision-making and financial contributions, even if it is small, is critical to keeping them motivated toward a goal.
Lamb says college savings is one example where kids can be involved in determining their own future.
“We always recommend families start contributing early for kids’ education,” he says. “Having your child put some ‘skin in the game’ with their own finances will help motivate them to finish school on time and with better grades.”
Tools, like Junior Achievement’s app, “Unlocking Your Future” helps teens contextualize the decisions they make and how they directly impact their financial future.
According to DiFranco, the app “helps teens, their parents, and teachers break down the cost of achieving your goals into real, easy-to-understand numbers. You can explore potential future income from careers you are interested in and even evaluate the cost of post-secondary education to help make informed decisions.”
Early, frequent conversations about finances empowers kids to make decisions for themselves, and builds important skills they need as they grow older. Setting kids up for success depends on honest discussions, understanding needs versus wants, and learning the importance of both short and long-term spending.
