Saving and Budgeting: 5 Key Concepts Every Kid Should Know Before They’re a Teen
As parents, we strive to make our kids' lives easier than ours was at their age. We strive to teach them lessons so they can grow up to be successful, responsible, and hard-working adults. It’s no secret, however, that a large part of being an adult is handling your financial situation. Despite this, financial education is only taught in 12% of US elementary and high schools, leaving the task to parents. Here are five key money concepts that every kid should know before they’re a teen:
Needs vs Wants
Although this concept may seem basic and self-explanatory, educating your kids on the difference between needs and wants can prevent them from developing overspending habits. Generally speaking, a need is something that is vital to live life, including food, water, shelter, clothing, etc. On the other hand, a want is something that improves the quality of life… aka everything else.
As your kids grow up, their needs and wants will inevitably change. Wants will turn from video games to cars. Needs will change from post-game snacks to rent. Be sure that they know which spends are the highest priority!
Opportunity Costs
In simple terms, opportunity cost is the choice not taken. It’s what is given up in favor of another option. For example, say you are giving your child the choice between two ice cream flavors. The opportunity cost is the flavor that he or she did not choose to order. What are the implications of making that choice? How will this choice affect him or her down the road?
Although choosing one ice cream flavor over another shouldn’t have too much of an influence on their future, understanding opportunity costs will encourage children to critically think about their decisions before making them. It will also allow them to systematically consider alternatives and consequences when spending.
Pay Yourself First
Even as adults, the idea of future financial well-being can get clouded by bills and expenses that need to be paid. Because of this, many finance professionals would advise following the “golden rule” of paying yourself first. Paying yourself first involves putting away some of your earned money, usually in a savings account, before doing any other spending.
According to the Federal Reserve, around 40% of all Americans could not cover a $400 emergency in cash. Tucking money away will allow for kids to be prepared when creating emergency funds, planning for retirement, and saving up for a big purchase. Making regular savings or investment contributions keep kids and adults on track to attain their short and long term goals.
50/30/20 Rule
No matter if you get your money from doing chores or from a full-time job, everyone needs to learn how to manage it well. The 50/30/20 rule is a budgeting concept that allocates 50% of your income to needs, 30% of your income to wants, and 20% of your income to savings/debts.
If the 50/30/20 rule doesn’t perfectly fit for you, adjust until it meets your needs! Of course, there will be times when it is unnecessary to spend 50% of your income on needs if all of your needs are paid off. In this case, the additional money not spent can go towards your savings. When you save with a purpose, it is easier to stay on track and motivated to attain your goals.
Delayed Gratification
We’ve all heard (or said) the famous phrase “if you eat your vegetables now, you can have dessert later.” Although no one likes to wait for what they want, patience usually ends up paying off. This concept of delayed gratification, or the resistance to the temptation of an immediate pleasure in the hope of obtaining a valuable reward in the long-term, also applies to money. For example, if you put money aside for retirement, you aren’t enjoying it today, you’re enjoying it later. In other words, if you want to reach your goals, in work and in life, you have to make tradeoffs.
Learning delayed gratification will not only leave your kids with more money in their pockets, it has also been shown to promote positive social behavior and improve self-worth.
For some children, these concepts may be easy to grasp, while others may need a little extra patience and understanding. Teaching your kids about money and investments when they're young lays the foundation for responsible money management and financial decision making later in life. It also ensures that they won’t come knocking on your door at 35 years old asking for a loan. By helping them, you’re helping yourself!
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