Four financial lessons you should be teaching your kids

As parents, our greatest hope is to raise happy, well-adjusted children who will be able to handle life’s challenges with confidence and competence.

No matter what their ambitions are, one thing is certain for every child: at some point, they will need to take responsibility for handling their own finances. Teaching them some basic principles of money, saving, and investing now will stand them in good stead to manage their own finances later in life.

Here are four key lessons every child should know.

Goods and services cost money

This is a very basic concept, but in the time of lockdowns and online shopping, kids today may develop a misguided idea that the things you want simply arrive at your home, as if by magic.

Teach them about the prices of the basics you have around the house – food, clothing, homeware, technology, etc. Talk to them about how you make shopping decisions, whether in store or online. If you use a credit card, talk to them about how that works.

Money is earned

Once kids understand that everything costs money, talk to them about how you go about getting the money you need.

For almost all of us, that means working to earn money. Pocket money is a great way to get kids thinking about saving and how to prioritise spending, and it’s even better when that pocket money is earned, for example by doing chores around the home.

This will teach kids that some amount of time, work and sacrifice is usually required in order to gain a financial reward.

Saving is a healthy money habit

Spending money on buying things is a tangible concept for children; you can take them to the shop where they can choose what to buy with the pocket money they have earned.

Teaching the value of saving might seem a little more abstract at first, but if they have their heart set on buying something that they can’t yet afford, resist the urge to jump in and help, because this is a perfect teaching moment. Saving is about discipline and delayed gratification.

It’s about taking your time and then thinking carefully before spending what has taken time to build up. It’s about being sure that whatever you’ve saved up for really is the best use of your money.

Teaching (and modelling) this kind of patience, thoughtfulness and prioritisation will help your child develop the skills they’ll need to resist impulse purchases and buying on credit later on in life.

Talk about your own money goals (like saving for a family holiday) and explain what steps you’ll need to take to get there – an online goal calculator may be helpful here.

The value of investing

Once your child has become comfortable with the idea of saving up the money they earn to buy the things they really want, you can introduce the concept of investing.

While saving is a guaranteed way to accumulate money in a piggy bank or a bank account, investing involves a necessary element of risk. Investing allows the opportunity to grow your savings meaningfully, though there is also a possibility of loss, especially over the short term.

The concept of risk is an important one for kids to learn, and it probably makes sense to get to this when they are a little older.

When discussing saving versus investing, remember to talk about inflation and the risk that poses to your bank account savings over time. Talk about diversification; what it is and how it helps to reduce risk when you are investing.

Talk about investing “opportunities” that will come along in your child’s life that seem too good to be true and probably are – they need to be circumspect and judicious when it comes to who they trust with their money.

The old fable of the tortoise and the hare may be a good analogy for what you want your kids to understand about money: slower, careful, consistent action will serve them better in the long run than trying to shoot the lights out with the fastest sprint.

• Lynn Bolin is the Head of Communication at Prudential Investment Managers.
• This article originally appeared on Moneyweb, and was republished with permission.