The money habits children develop when they’re young can shape their financial future. That’s why it’s important to set them on the right path early on. Here are a few key financial tips to start with.
1. Money today is worth more than money tomorrow
Money in your pocket today is worth more than the same amount you might get down the line because of its earning potential. That’s why your kids should always be putting their money to work.
At the very least, they should stash whatever cash they earn or get as gifts into a savings account or certificate of deposit to collect interest while that money isn’t being used. Even if they only earn a few dollars in interest each year, it’s still free money, and over time, small amounts of interest can really add up.
Case in point: If you stick $500 in a savings account paying 1% interest annually, over 10 years, that balance will grow to $552. As your kids get older, you can start introducing them to the world of stock investing, which offers even more opportunity for growth. That same $500, for example, could turn into almost $1,100 after 10 years if it’s put into stock investments that generate an average annual 8% return, which is slightly below the market’s long-run average.
2. Always look for value
There’s nothing wrong with spending money on something you want, but there’s no reason to pay more than you have to. Before your kids run to spend their birthday money on the latest fads, show them how much further those dollars will go if they wait for those items to go on sale.
The same concept applies to paying for name-brand items — there’s often no reason to pay a premium for one logo or label over another if both are equal in quality. The next time you take your kids to the supermarket, show them the cost difference between name-brand products versus the store brand.
Buying store brands over name brands will save you an estimated 25%, and chances are, your kids won’t taste a difference. In a series of blind taste tests conducted by Consumer Reports on various supermarket staples, the subjects found no discernible difference between store brand products and name brands.
3. Saving is less expensive than borrowing
Many adults are quick to whip out their credit cards when they see things they want to buy but can’t afford. In fact, according to recent data from ValuePenguin, the average U.S. household has $5,700 in credit card debt, and over 38% of households are currently carrying balances.
While kids don’t have quite that same luxury, they might see you using your credit card and think it’s a smart practice. That’s why you should not only teach them the right way to use credit cards, but show them how expensive borrowing can be.
The next time your children want something they don’t have the cash to buy, offer to lend them the money (or give them an advance on their allowance) but charge interest that they’ll need to pay back. Once they see that borrowing money makes a $20 item cost $22, it’ll discourage them from employing that practice later on.
4. Your friends’ money is none of your business
Many adults run into trouble trying to keep up with the Joneses. While it’s natural to be envious of those who have more, it doesn’t mean you should rack up debt in an effort to keep pace.
In a study by TD Ameritrade, almost 25% of millennials admit they feel pressured — and often act on that pressure — to match their friends’ spending habits, but that’s a slippery slope you’ll want your kids to avoid. You never know where somebody else’s money is coming from, or how much debt someone else has. Teach your kids to focus on themselves and their own finances, and with any luck, they’ll grow up to spend wisely and be content with what they have.
5. Know what your time is worth
Your kids should be willing to work hard and earn their way through life, but they should also understand that their time is worth money.
Say your kids decide to open a lemonade stand to earn extra cash, but you live on a quiet street and don’t see their effort paying off. You can applaud their entrepreneurial spirit but also explain that it may not be worth their time to spend a hot summer afternoon peddling lemonade to come away with a measly $5.
A strong work ethic is important, but your kids should make sure they’re being paid for the time they put in. It’s a skill they can take with them when they get older and need to negotiate salaries — which, incidentally, you should also encourage them to do from an early age. A recent Glassdoor survey found that more than half of Americans don’t negotiate their salaries, so teach your kids not to be afraid to ask for more (within reason).
The lessons you impart to your children now will carry through to adulthood. Teach them well, and with any luck, they’ll grow up to be the responsible savers and investors you want them to be.