"I have two children, aged 10 and 15, and just wanting to know how I can teach them about finances and how to start making good financial habits now in a way that they can understand."
- Question from Effie in Brighton, SA
Top answer provided by:
Ash Mcauliffe
That is a fantastic question and one that I hold close to my heart as I have three young children and they each have a different approach when it comes to money.
As parents we want to set our children up for the best future possible and teaching them how to make smart decisions with their money is a valuable skill that we can give them.
There are many fantastic financial literacy programs available to parents and schools, but being financially literate and having the skills to make considered financial decisions are not the same thing.
There are three terms that I like to define when I’m speaking with clients about money management: financial literacy, financial capability and financial self-efficacy.
Financial Literacy - Literacy is having some base knowledge, such as what a bank account is and the difference between a debit card and a credit card.
Financial Capability - Capability is the ability to act on your knowledge, such as being able to open a bank account and use your credit card.
Financial Self-Efficacy - Self-efficacy is the confidence in your ability to make decisions to achieve an outcome.
Think of these like the difference between being able to read a book compared to comprehending the story, but we want our children to be able to write their own story.
To truly teach our children good money habits, we want to give them financial self-efficacy, and this comes from experiential learning which is to let them experience the outcomes of their decisions.
All of this is great to know but the question is: How can we give them the experience of making financial decisions?
In short, you need to give them some money and let them spend it.
Giving them money:
Having a structured system where they can earn money helps them understand that effort is required to receive money. It might be in the form of an allowance for doing set chores each week or for older kids it might be a part time job.
Pro tip: I like to have a few bonus chores available too so they can see the benefit of making an extra effort.
Letting them spend it:
Whether you use cash or a bank account or an app specifically designed for kids banking, the important thing to remember is to let them experience the highs and lows of their good and bad decisions.
The first thing though, is to encourage goal setting, such as a large purchase or to save for a specific amount that they can work towards.
The hard part will be resisting the urge to tell them not to buy something, particularly if it is something that isn’t great value. I use two mechanisms when it comes to spending, trade-offs and delaying the impulse.
A trade-off conversation is where you remind them of their goals. It sounds like this, “I know you want to buy X today, but don’t forget that you are saving up for Y. Which one is more important to you?”
Delaying gratification is where you encourage them to step back from a decision momentarily to let them think about it. “Why don’t we keep looking in case we see something else you like, and we can come back if you still want it?”
There will be times when your kids make bad decisions, or wasteful purchases, but the key here is the experiential learning. They need to know that it is their money, and they are responsible for how they spend it and your role is to help them, not to say yes or no to their spending.
I also like to ask them questions to help them reflect on purchases, and again, the purpose is for them to reflect, not for us to tell them what we think of their purchases. My go-to question is, “Are you still happy with what you bought?”
If we let them experience earning, saving and spending with small financial decisions, they will be better prepared later when they need to make some bigger financial decisions.
Tell me, and I will forget. Show me and I will remember. Involve me and I will understand. -Confuscious
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Comments1
"Hi Ash, This is a great article. Kids I know use the Kit App (https://heykit.com.au/) for pocket money. It also includes quizzes and nudges that help teach kids and teens real life lessons about managing money. I thought Effie may want to check it out. Cheers, Carly"
Carly 14:41 on 03 Mar 23