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How to Help Kids Become Debt-Free Adults: Money Management Should Start at Home and Start Early

At home kids are taught good manners, good behavior, healthy eating habits and so on, but how often do parents teach children about good money habits? Kids go from watching adults zip out cash from ATM machines to having their own credit cards without any break for financial common sense. That is why it’s common for an average 19-year old to max the credit card and rack up debt even before getting a job.

At What Age Should Kids be Introduced to Money?

Good money habits start early. Start teaching children about money as early as 2 years or whenever a child starts to develop basic recognition of money and starts demanding things. As soon as children can say “I want”, they are ready to begin their first lessons about money.

For a child this young, it is important to let them feel and touch money. Let them go through a wallet or a wad of cash and understand that it is called money. Once this association is formed, start by educating a child about the value of money.

Teach Young Kids the Value of Money

Children pick up remarkably quickly the concept of trading money for material objects. They see adults paying for things at the supermarket, at the toy store, in the restaurant, etc and automatically make the connection between money and goods. But they have no idea where this money comes from because adults hardly ever teach kids about “making money”; at least not this early on in life.

So the first lesson to teach kids here is that money is earned though work. When they see their father headed to the office, tell the child “daddy is going to work so he can make money”, or when a child sees a work-at-home mom sitting in front of the computer, tell the kid that “mommy is making money by working”. This will help give a young child a very clear indication that money is something earned through hard work and not something that simply flows out freely and on-demand from short term loans and banks. Be honest; isn’t the latter the most conception small children have about where money comes from?

Secondly, tie money in with benefits. Say that “money will help us buy you some new books so you can read your favorite stories”. This will teach children that earning money is beneficial to fulfilling their needs and wants.

Teach Financial Common Sense to the Young

Being financially literate does not mean having to take a complicated course in financial management. Rather good money habits start with nurturing the ability to make simple common sense financial decisions on one’s own.

So how does one develop financial common sense in children? Teach them that what goes out must be less than what comes in. Adults can show kids how to do this by using examples from everyday life.

When a parent is out grocery shopping, count how much money there is in a wallet as opposed to how much money the apples cost. Tell the child whether there is enough money to pay for things or whether money is short and therefore everything can’t be bought today.

When children start to get cranky and demand that pack of M&Ms, explain that the money is all finished for now but more work will yield more money soon for the purchases.

Parents should make sure to behave in the manner that they want the child to emulate. Don’t use credit cards in front of children or if they must be used, explain to children that this card means money flowing out and it will be depleted soon. This will help them to understand the concept of fiscal finiteness, even though they can’t physically see money being exchanged.

Teach children that money is not a bad thing! When they earn money or see parents earning money, show them how good it feels to spend it on things that the parent had planned to buy with it. This reduces impulse buying and helps children set their own goals for cash earned.

Teach Children to Save and Invest Accumulated Wealth

Once children are older, start them on the concept of saving and investing money. The rule of financial saving is 10%, so make sure to ask them to save a dollar for every $10 they receive.

Open a bank account or store their money in a separate (read: secret) chamber. Let them watch it accumulate and decide on an end goal for the money when it reaches a specific number. Example “You can buy a new bike when you’ve saved $30”. By assigning goals, parents are ensuring that the money has a purpose and that money is simply the means to an end and not an end unto itself (the latter behavior is the cause for miserliness).

Start early, teach often, use everyday occurrences to make a point and lead by example – this will help a child grow to be an adult who is financially independent and debt-free.