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As we build wealth, we develop the necessary attributes of effective financial management. This is why teaching our children about money is better than giving them money. Passing our wealth doesn’t mean we automatically pass the characteristics of being good financial managers.
Ultimately, financial management is more of a discipline than a skill. Living within your means. Monitoring expenses. Saving for rainy days. Delaying gratification. These are essentials to effective financial management – yet they do not need elaborate skills to perform.
Any person who consistently applies the disciplines mentioned above in his life will do well financially. No doubt about it. But that does not imply we should stay there for the rest of our lives. Helping our children develop a knack for money will not only impact them financially. But also personally and professionally. If you are wondering what money skills you need to teach your children, continue reading below.
Disclaimer: the content of this article is based on the author’s opinion. This post is not intended to give professional advice.
Are Financial Management Skills Natural?
I haven’t heard of any person born with exceptional financial management skills. Ninety-nine percent of self-made millionaires I have talked to and have read about had experienced terrible money problems at some point in their lives. This means they were not naturally gifted in managing their finances. But the immense gap between them and those who still struggle financially is that they found remarkable people who taught them about money. Robert Kiyosaki had his Rich Dad; Warren Buffett had Benjamin Graham; Dave Ramsey interviewed many old rich in his circle.
Let’s not go far. If you consider yourself good with money, it is likely someone has also coached you on managing your finances. Am I incorrect? Perhaps there are prodigies out there. But for the majority of kids, they need someone like their father to be skillful with money to train them.
What Are The Practical Money Skills You Should Develop and Teach Your Children?
Let us not waste the opportunity to teach our children about finance whenever they are ready. A good age to start is five or when you observe they have already grasped the fundamental use of money: to buy stuff. Below is a list of practical money skills we must develop and can teach our children.
There is no management without a target. The purpose of managing your finances is to ensure your money flows in the right direction. Goals serve as the backbone of financial management. But setting relevant goals is not as easy as it sounds. It requires skill to be able to determine worthwhile objectives. What I am about to tell you next may have already become a cliche. The SMART goal-setting method has already been taught and used everywhere. SMART is an acronym for:
The details of this goal-setting method are beyond the scope of this blog post. You can follow this link to learn more: How To Make Your Goals Achievable. But essentially, goals must possess these five qualities to be effective. Of course, this concept might be too advanced for our kids to grasp, especially if they are under ten. As parents, perhaps we can help them set short targets they can aim for, like buying a toy, starting a savings fund, or helping a cause.
If goal setting is the backbone, budgeting is the heart of financial management. A written budget is a level up of living within our means. It is a skill that will make all aspects of our finances work together. As the heart pumps blood to different organs in our body, budgeting is the process of directing our money to the various priorities in our lives. Here is a simplified version of what a budget looks like:
- Savings – 20%
- Necessities – 50%
- Giving – 10%
- Wants – 20%
This figure shows you will allocate 20% of your income to savings, 50% to your needs, 10% to charities, and 20% to buy anything you want. Let’s say you receive a payment of $1,000. Here is how it is going to look in actuality:
- Savings – $200
- Necessities – $500
- Giving – $100
- Wants – $200
Feel free to use and tweak this example according to your needs if you still do not have a budgeting system. Here are other creative ways to budget:
- The envelope system — distribute the actual cash in four to seven envelopes and label them according to your priorities. The fund in those envelopes should only be spent in the category written on them.
- The pay-yourself first method — determine how much money you want to keep before spending what is left.
- The “no” approach — A simple idea where you say no to yourself when you do not have the money to spend. This method’s primary intention is to keep you from getting into debt as it discourages you from using credits or loans.
- The zero-based budget — is the practice of spending your income on paper before expending it in real life. The total, in the end, should be zero. This method makes you think hard about where to spend the money you have currently on hand.
For kids and beginners, I personally recommend the pay-yourself first method. I use the 20/80 principle. Save 20% and spend the rest.
Income is the lifeblood of financial management. And this is, more often than not, the idea our children miss. They believe money simply comes out of the ATM or mom’s drawer. Children should understand how money is generated. They must know it requires knowledge, skill, and hard work. Giving them money without any effort will only make matters worse. This is why teaching kids about selling is vital. Through this process, they will learn the concept of getting paid by providing value to others. Below are a few ideas to teach our kids about selling:
- Set up a lemonade stand in weekend markets.
- Encourage them to sell clothes and toys they no longer use.
- Allow them to join a fast-food kiddie crew.
- Bring them to your office.
- Do some role-playing at home.
One of the quotes by Warren Buffett that resonates with me profoundly is this:
If you don’t find a way to make money while you sleep, you will work until you die.Warren Buffett
Do you want your kids to become wealthy? Then, teaching them about investing is non-negotiable. Investing is the practice of making money to make more money. It is a skill of buying valuable assets that have the potential of giving future returns. I admit this is a challenging concept to teach our children. Even adults will struggle to grasp the whole notion of investing. But fundamentally, all they need to understand is the idea of interests.
Generally, interest is the money you earn for lending money – or pay when borrowing. My mentor told me he understood this concept at a young age because his parents always doubled the money he saved at the end of each week. He said his natural response was, of course, to save as much money as he could. We can copy and paste this with our kids since that is how investment also basically works in real life (but at a much slower pace). Putting our money in instruments that earn an interest rate of 10% per annum will double it in about seven years.
The problem with the pursuit of money is that it can take control of our hearts. If we are not careful, we may live our lives for nothing else except to accumulate more wealth. This is often the result of fear, pride, and self-centeredness. I don’t know about you, but I do not want my children to live that way. If we are teaching them about money, let’s make sure we also train them to defend themselves against its side effects. Thus far, the best antidote to prevent materialism from taking control of our hearts is our ability to give back. It is like saying, “money, you are not the master of my life. In fact, I can give you away!”
Giving is also a valuable measuring stick for how much control money has in our lives. We should evaluate ourselves each time we find it difficult to share our wealth. Aside from paying off my debts, being generous has also been my journey for the past five years. I have been training myself to be detached from money, so I can manage them much better. This is true financial freedom.
What I did was dedicate a budget for giving. I called it the Giving Fund. All tips and help I extend to others come from that fund. I must say it was one of the best decisions I ever made in my life. It made me more cheerful when giving, knowing it won’t affect my family’s daily operations. Some ideas to teach our children about giving:
- Instead of selling, encourage them to give away toys and clothes they no longer use.
- Allow them to put their own tips after dining in a restaurant.
- Teach them to give 10% of their earnings to their chosen charities.
Last one before I close this post. Making sound decisions is part of financial management. There are myriad decisions we have to make when managing our finances. We sure will make many dumb ones, but what is critical is we should dare to decide. Many are paralyzed because they are too afraid to commit mistakes. This is what I typically see with most children and adults nowadays. It’s either they became too comfortable about someone calling the shots for them, or they have had a painful experience the last time they made a decision.
I train my kids by encouraging them to make choices. I help them by giving some pros and cons, but it will ultimately be up to them. It can be as mundane as what clothes they want to wear; to as critical as which ice cream flavor they want to buy. In the end, I tell them there will always be consequences whenever we make the wrong choices. And it’s okay. The important thing is we man up and learn from it.
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