How often do you discuss money with your children? If your answer is "not often," you're not alone. A recent study from investment firm T. Rowe Price found that 72 percent of parents are at least somewhat reluctant to discuss financial matters with their children. Yet with a nationwide student loan debt at an all-time high of $1.2 trillion, it's more essential than ever that young people understand how to manage their money wisely.
It's not all bad news, though. There is an opportunity to help your children form strong spending and saving habits at an early age, and doing so can have a concrete impact on their futures. For example, recent research suggests that children with savings - even as little as $1 to $499 - are four times more likely to go to college than children with no savings at all. There are many reasons why it's beneficial for children to learn how to manage money from a young age, and getting started sooner rather than later can drastically shape your children's financial futures for the better.
Here are six ways you can encourage your children to develop good saving and spending habits.
Find a balanced allowance. One reliable rule of thumb for weekly allowance is to give your children $1 for each year of their age. For example, if your child is eight years old, you would give her or him an allowance of $8 a week. Of course, one size does not fit all, and you can adjust this allowance to fit your family rules and values, but this is a solid guideline for younger children and even gives them an annual "raise" as they get older.
Show them where the money goes. Younger children respond especially well to visuals, and the jar method is a popular way to help children learn how to save money. Since jars are clear, it's much easier for children to see how much cash they can accumulate, or how quickly money can vanish when it's spent.
One popular system is three jars: one for saving, one for spending, and one for giving money to charities. Parents can categorize the jars as they see fit, but having your children allocate their allowances among these three categories is a great way to teach them how much money should be saved and how much should be spent. If children opt for the charity jar, it also teaches the value of sharing with others and fosters a philanthropic spirit. One possible way to break down a $10 allowance is $3 for saving, $5 for spending, and $2 for charitable donations.
Reward them for saving. Back-to-school shopping presents a great opportunity to teach your children how to differentiate wants from needs. Set a firm school shopping budget, and make a list with your children of what they need for school. Go over their list to see which items are really necessary versus which items are wants. Once you've determined what they need, help them calculate how much is left in the budget to spend on wants. Consider rewarding your children by giving them the surplus money to spend as they choose - but only if they've covered all of their necessary supplies first. Check their "needs" list with the one provided to you by their school to ensure they'll have what they need. When you're shopping at the store, let your children know that they could potentially increase their surplus money by checking for cheaper supplies or buying items on sale. This exercise is a relatively low-risk way to teach children how to differentiate what they really want from what they really need.
If you have a teenager who's hoping to drive a new car soon, consider matching his or her savings. For example, you could tell your teenager that if he or she saves $1,500 from a summer job to buy a car, you will contribute an additional $1,500 toward the cost of the car. You may choose to set a limit on how much money you'll match, but this is a great way to motivate your teenager to save and even serves as an early lesson on employer-matched 401(k) accounts.
Take them to the bank. Middle school is a good time to replace that savings jar with a savings account, and if your children have been saving cash for years, it can be very rewarding to take that money to the bank or credit union and open their first account with it. This is a great way to introduce them to the concept of interest, and how savings accumulate over time when left unspent. Even children as young as five can open a savings account, and many banks and credit unions make this easy for parents with savings clubs for children. Visit the Consumer Financial Protection Bureau's website for more information on savings accounts for children.
Talk to your children about essential expenses. As your children enter high school, you may want to consider delving into more complex financial concepts with them. If your teen has a paid job, review their paycheck with them and explain where the money goes and why - for example, if money is withheld for tax purposes. Or talk to them about the larger expenses on the horizon, whether it's a car or college tuition, and discuss all the financial pros and cons of these investments. Regardless of how much your teen contributes to these costs, it's important to discuss these big-ticket items together so your child understands the value of these purchases.
Help them earn their own money. Earning income through hard work is one of the best ways to learn the true value of money. Encourage your children to earn money, whether it's through setting up their own lemonade stand, doing chores around the house or neighborhood, or, if they're teens, getting a part-time or summer job. This helps your children supplement their allowance and teaches them the real-life value of working. You may also want to consider requiring that your children put a portion of their income into savings instead of spending it on clothes and entertainment.
Bottom line: Learning how to save and spend wisely is crucial to good money management, and teaches other important values. The best way to help your children build solid financial skills is through practical, age-appropriate lessons, which are relevant as they grow into young adults.
Nathaniel Sillin directs Visa's financial education programs. To follow Practical Money Skills on Twitter: www.twitter.com/PracticalMoney
This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.