In school, your children learn how to work with decimals, find the value of "x" and solve complex equations. But numbers on paper and numbers in life are two very different things. Kids may learn how to count money in second grade, but will they learn what to do with it? Will they learn financial skills for life, including concepts like budgeting and how investing works?
“Empowering your children with knowledge and the ability to be financially sound provides them security and confidence that they need later," says Joyce Crivellari, Senior Wealth Strategist at UBS and parent of four children.
As parents, we know this is important, yet in a recent Visa survey, only 18.5 percent of parents said they felt that teenagers and young adults were ready to manage their own money.1
“Managing money can become disruptive and disorienting for young people who are trying to do it on their own for the first time," says Crivellari, whose team authored the paper, "Financial education: How to educate children about money. " That's why you have to begin teaching the skills from a young age.
Crivellari has five suggestions for raising financially fit kids.
1. Make allowance meaningful
“The biggest mistake parents make with allowance is not making it meaningful," Crivellari says.
Before you give allowance, Crivellari suggests, decide what expenses your child will have to use the money to cover. Continue to fund normal kid activities, but make your children responsible for paying for special things they want, so they begin to have a sense of budgeting. If they run out of money before it's time for the next allowance, be careful of bailing them out, she says (though she acknowledges it can be tempting).
2. Introduce the concept of "spend/save/give"
Crivellari recommends creating three jars: one for spending, one for saving and one for giving. For example, if you give your 7-year-old a $2 allowance, have her put a quarter in “save," another quarter in “give," and the $1.50 balance in “spend."
“Let a child go through the physical act of putting the money in the jars and putting the overage in the spend jar," she says. This approach can help your children understand that, as adults, they'll need to use their earnings to satisfy short-term spending needs, as well as medium- and long-term needs and wants. Crivellari also believes in introducing the concept of charitable giving at a young age, including researching different charities with your kids and letting them choose where they would like to contribute.
3. Encourage savings
There is a reason Crivellari is a fan of creating a “save" jar.
“The physical act of putting something in a specific place is like magic for the younger kids," she says. As they get a bit older, savings accounts in the bank are more appropriate. It's a good chance to teach them about compound interest, showing them that the earlier they start, the more their money will be worth. For instance, if a child starts saving $1,200 per year in a tax-deferred account for 40 years at age 22, and earns 8 percent annually on her investments, she will have accumulated just over $360,000 by age 62. Waiting just eight years—until age 30—to start means she'll need to save $2,300 per year to accumulate the same amount by age 62. Modeling saving money is a good way to imprint this habit on your children, and you might consider matching the amount they save one to one, or 50 cents to the dollar.
4. Coach them to use pre-paid cards
A pre-paid gift card can be a wonderful tool for learning how to budget, especially for discretionary expenses. For instance, if your son goes to Starbucks every Friday after school with his friends and orders the same drink each time, you can work with him to understand how to budget, so he won't run out of money until the next time the card is set to be refilled (decide those dates ahead of time). “The teaching and the coaching is so critical with pre-paid cards," Crivellari says. Handing one over without using it as a learning experience is a missed opportunity.
5. Get practice investing
Start with a set amount—perhaps $500—and use it to teach basic investing to your child. Work with your child to pick a stock she's interested in (perhaps one that matches her hobbies). Then, look at how the stock has done and do the math with your child to see how her $500 would be doing if she invested it in that stock a few months ago. Once you've reviewed stocks and she's made her choice—perhaps choosing one “safe bet" and one riskier stock—work with your UBS Financial Advisor to actually make the investment. “Treat it like a game with them, but with real money that will be theirs," Crivellari says.
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