One of the foundations of personal finance is budgeting because you could essentially end up bankrupt despite earning a decent income, if you fail to budget your money properly. This example illustrates my point:
Mr. Salamander earns $1,ooo,ooo per month but spends $1,000,500 during that period. At the end of each month, he accrues $500 in debt.
Miss Flanders earns $3,000 per month and manages to save $200 during that time frame.
After a year, Mr. Salamander has reduced his net worth by $6,000 but Miss Flanders has improved her’s by $2,400. Assuming that niether person had any assets to begin with, the difference between the two becomes pretty stark over time.
This is because Miss Flanders budgets her meagre income well while Mr. Salamander, despite earning millions each year, fails to budget his finances, making him worse off compared to the lady earning a fraction of what he does.
Budgets and children
As a parent, budgeting is one of the first financial tools you should teach your children. This is because budgets are the building blocks of personal finance and children can be slowly introduced to budgets as soon as they begin to understand the idea/concept of money. A budget gives people a sense of control over their money, which is very empowering.
Lead by example: parents are financial role models
During their formative years, children are heavily influenced by behavior patterns, beliefs and attitudes of their parents. As a parent, if you demonstrate irresponsible financial behavior, such as impulsive use of credit cards or other forms of careless spendings, your child will tend to mimic your behavior.
So the first step in securing your child’s financial future is to acquire financial discipline yourself. Of course, your children have the capacity to develop sound financial skills on their own over time, but having a role model or mentor right in front of them (i.e. you) your kids will find it easier to adopt the desired level of financial discipline over time.
Needs, wants and luxuries – children must know the difference
This is something you can start teaching children from a very young age. I’ve seen children, as young as five, differentiate between these two states of demand, albeit at a very elementary level. Here is a simple definition for each:
- Necessities are basic human needs that ensure survival. Examples include food, clothing, shelter and medical care. Everyone must have these to live.
- Wants are a step above “needs” and are desires that we seek for the sake of convenience, support or to prevent discomfort. Examples could be a basic cellphone, extra pair of shoes and clothes, going out to eat once in a while instead of cooking at home.
- Luxuries are items that are not at all essential for survival and provide pleasure and comfort, at a pretty high price. Branded items (clothes, cars, accessories, electronics, etc.) easily fall into this category, as well as high end travel and restaurants.
This list varies for everyone, which makes it difficult to create a fixed set of examples. Here’s a slightly more detailed article about needs, wants and luxuries that we published last year.
Delayed gratification and financial discipline
Your kids may make a stellar budget at the start of each month, but in order to follow it, they must pursue the idea of delayed gratification. Instead of impulsively purchasing items that they want to gratify themselves, parents should teach children how to delay or properly plan their purchases in order to align their demands with their finances.
A very simple analogy is that of saving your icing for the last bite of cake rather than eating it first. Delayed gratification (saving the best for last, as some put it) ensures you have thought well about the purchase and also increases the amount of pleasure derived from the purchased item as a bonus!
Teach them basic financial ideas about debt, saving and investment.
For children to properly understand the budgeting process, they must also understand certain financial concepts. A budget shows us how we plan to spend the money we possess and these ‘spending plans’ must make financial sense. You can start by telling your kids about how:
- Saving must come before spending,
- Debt is a legal obligation and a ‘promise to return the money’ you borrowed,
- Different types of debt are incurred,
- Some debts are considered good while others are considered bad,
- Saving goals are set and achieved over time.
Use examples to teach children these financial concepts.
Let’s assume your 10 year old child recieved $5 as a weekly or monthly allowance (pocket money) and he/she wishes to buy a toy that costs $15. You can either get him/her to save 3 installments or borrow some money from you for the purchase. Explain that the borrowed money must be paid back and impose a small token fine for late payment.
The idea isn’t to punish your children with interest fees but to simply show them how debt works in the real world and that if you spend more than you earn, it has financial repercussions.
Upgrade your child’s budgeting skills with time
Initially, your children will budget their weekly or monthly allowance. As they move into their teens, parents can allow them to plan and budget for a family event like a vacation or party. Your children’s money management skills will improve over time as they learn from their mistakes under your watchful eyes as a parent.
Play games that teach financial management
Monopoly and similar board games are a fun way to teach children about money – building assets, saving money for emergencies, regular expenses, future purchases, etc.
These games make personal finance fun and present an opportunity to bond as a family.
Are there any other board games you can think of that impart essential money skills? How about any other fun ways to teach children about money management?