The transfer of wealth to your children can be extremely difficult, particularly in high net worth families. There are plenty of horror stories of the second generation behaving badly when it comes to the entire inheritance process. For a parent planning his or her estate, knowing that your child is well-prepared to receive significant funds is a great comfort; being unsure of her readiness and financial maturity can be a tremendous burden that hangs over an already emotional process.
In many cases, it’s vital to begin teaching your child the basics when he or she is young; the sooner they understands the value and concepts of financial responsibility, the stronger their foundation. By doing so, you’ll also help your child become more independent and ready to handle the inheritance that’s been given to them.
Here are some tips for helping your child learn the basics of proper money management and the principles of finance:
- Model healthy financial behaviors. From the start, you should begin leading by example. Talk often (but calmly) about money since they’re most likely to emulate your actions and attitudes.
- Teach them the value of money. The first lesson kids should learn is that it holds value and will be gone when you spend it. You can help them understand this concept by using cash as frequently as possible, since they can actually see the transaction of purchasing a product and money being physically gone.
- Explain to them the difference between needs and wants. As you know, there are expenditures that are necessary and those that are simply for fun because you want them. Talk to your kids about this concept by sharing with them some of the ways in which you spend your money. However, avoid saying that you can’t afford something. Instead, try saying you choose not to spend money in a particular way.
- Give them an allowance. This is a great way for kids to learn how to manage their own money. You can start off weekly with a small amount for young kids, bi-weekly for pre-teens, and monthly for teens, which will challenge them to plan more as they get older. The best way to start with a young kid? Have them dedicate a portion of it to spending and a portion to savings. By giving her the power to make their own decisions with the spending portion, they will gain a sense of responsibility and become more interested in managing her finances.
- Teaching them to save. When helping your child understand the concept of saving and interest, open up an interest-bearing savings account for them and take them to the bank when they gets their allowance. Explain the purpose of the account and what it means to earn interest on the money they save. You may also want to review monthly statements of their account to review the balance and explain why it grows.
- Embrace teaching opportunities. A trip to the grocery store can turn into a great learning opportunity as you show you child the importance of planning, saving, and looking for a good bargain.
- Talk about investing. As your child gets older, you can begin talking about more complex concepts such as the risk and rewards of investing. You should also consider giving them a few hundred dollars to invest in the stock market. This will also help further educate them on more sophisticated investing concepts.