Have you talked to your children or grandchildren about the importance of saving and investing?
Learning those fundamentals at a young age is key to developing a sense of financial literacy. And those are conversations we need to be having, according to the numbers.
A recent survey by McGraw Hill financial found that only 57% of American adults are financially literate, with a clear understanding of basic concepts of how to manage and invest their money. That’s better than many other nations, but it still suggests there’s substantial room for improvement.
The shortfall in financial literacy has real-world consequences, with too many Americans burdened with high levels of debt and low levels of savings for retirement, education, health care and other needs.
The best lessons kids can learn about how to manage money start at home. Here are some ideas for how you can get them started thinking about responsible spending, saving and investing today, to set them up for financial success later in life.
- It doesn’t take a lot of money to start. Maybe you think that only the wealthy can afford to teach their kids about investing, since they can give them a big nest egg to start with. But that’s not true. There are a variety of low-cost ways to get started with saving and investing.
- Help them open their own accounts when they’re ready. For younger kids, a piggy bank or savings jar is a good place to start. But as they get older, helping them to establish their own savings account with a financial institution will help to encourage positive savings habits. Plus, with online account access, they’ll be able to chart their progress in real time, which can provide a psychological boost as they see their bottom line grow.
- Start with short-term goals. Younger children may have a hard time understanding the need to save for long-term future goals-the future is just too far off and abstract.
That’s according to the Better Money Habits initiative, a partnership effort by Bank of America and Khan Academy to encourage saving. They suggest starting with a concrete, short-term goal, like saving for an item the child would like to buy, to help them understand the concept of saving with a longer term objective in mind.
- Find ways to make it fun. Let’s face it-deferring gratification isn’t at the top of anyone’s list for a good time, and that’s especially true for kids. So find ways to make saving and investing fun for them.
- Emphasize the time value of money. One of the most important lessons to understand about saving is how compounding works to make your money grow over time-and it’s not hard to find ways to make it fun and exciting for kids.
One classic example is the “doubling pennies” experiment, in which you put a penny on one square of a checkerboard and double it every day for a month. But it’s gonna take a lot of pennies-after 30 days the total soars to over $10 million!
- Introduce budgeting for older kids. Too many Americans struggle with basic money management and keeping their spending within their means. To get teens and even younger kids off to a good start, introduce them to the concept of budgeting to help them hone their money management skills.
A good place to start is by employing a proportional budgeting scheme that helps them to visualize how to designate portions of their budget for spending and saving. (For more ideas on budgeting)
- Set a good example. One of the hardest lessons may be to serve as a positive financial role model for your kids by managing your money wisely, saving for long-term goals like college and retirement, and avoiding unnecessary debt.
One way to make saving more fun and exciting for kids is by putting technology to work to meet a savings challenge. Check out some of the various savings apps available for kids to set goals and track progress.
Every family is different, and it’s up to you to decide how much information about family finances is appropriate to share with your children. But the more your children understand that you apply the fundamental lessons of saving and investing in your own life, the more it will serve as a powerful reinforcement of the lessons above.