Educating children about personal finance at an early age is an activity that is important, and can be fun for your child as well. Here are some recommendations on how to teach your children to become regular savers and investors.
As soon as children can count, introduce them to money.
Children learn by observation and repetition, so once they are familiar with numbers and counting, introducing them to money will give them a great start on understanding personal finance.
Help children learn the differences between needs and wants.
Teach your children the difference between items that you need to buy, such as groceries and other necessities, opposed to items that you want to buy, such as televisions, DVD players and other non-essential items.
Give children an allowance in denominations that encourage saving.
Instead of giving them a $5 bill for allowance, give them five one-dollar bills and encourage that at least one dollar be set aside in savings. If you want to add to their financial learning experience, offer them 6% interest on money that they save, and they will see first-hand at how interest makes money grow. Saving $5 a week at 6 percent interest compounded quarterly will total about $266 after a year, $1,503 after 5 years, and $3,527 after 10 years
Open a savings account for your child in their name.
One of the keys to savings success is having routine savings habits. By opening up an account in your child’s name, it gives them an early lesson in savings and banking.
Allow children to make spending decisions.
Whether your children make good decisions or poor decisions, they will learn from their spending choices. Talk to them before the spending takes place, and let them know the pros and cons of their decision. This is a good opportunity to teach them about researching a product in order to make the best decision, and get the best price for the item. Allow them to make their own mistakes, so they will learn directly from them.
Explain to your children how credit cards work.
Even if they fully don’t understand the principals of interest, by teaching them early about how credit cards work, your children will be aware of the financial risks that credit cards can cause.
Teach your children about financial trading and investing.
Open a custodial account with a brokerage firm to teach your kids about investing. Sit down with them and make investing decisions together. Custodial accounts also gives you access to the brokerage firm’s research, which can be a good way for you and your kids to learn about stocks.
Several firms, such as ING Direct’s Sharebuilder program, make it easy to set up a custodial account. Many parents love this account because there’s no minimum and no maintenance fees, and if you sign up for regular monthly investments through the automatic investment plan, you’ll pay only $4 per trade.