4/4/2016 -- Parents are the most important influence on the financial behavior of their children, so it's critical to begin teaching the next generation of consumers, investors, savers and donors about fiscal responsibility as soon as they begin to handle money. Since research shows that children's money habits are formed by age seven, it's best to begin your children's financial education before they enter elementary school.
"The sooner we begin teaching children how important it is to save money to pursue their long-term goals, whether it's buying a new bicycle or the latest computer game, the more likely they will save when they're adults," said Kara Taylor, managing director for Tompkins Financial Advisors.
Here are five financial lessons that can help children learn how to handle money wisely:
You're in a store buying a birthday present for your mother when your toddler starts having a temper tantrum because she wants that stuffed dog on the shelf. Do you buy her the animal doll to quiet her down? This is one of those teachable moments when children need to learn that they will have to wait to buy something they want. Tell your child that today is the day to buy a birthday present for grandmother, and not a toy. If she can learn how to delay gratification as a child, she will be better prepared to resist buying things she can't afford as an adult.
Saving an Allowance
From the age of three, children can understand financial concepts such as saving and spending. Giving children an allowance at this age is a good way to teach them how to save money while also allowing them to buy small purchases. While some parents tie allowances to household chores, others believe that children should simply pitch in without an allowance. When you start giving your children an allowance, make it a routine, giving the same amount on the same day each week. Set parameters from the start, such as requiring your child to divide the money between what she will save in a piggy bank for things she can't afford right away and what she is allowed to spend immediately.
Learning about Compounding
By the time your children enter middle school, you can introduce the idea of compound interest. Explain that this allows people to earn interest both on their savings and on the past interest from their savings. Use specific numbers to describe compound interest since that is easier to understand than in abstract terms. Allowing children to open a savings account in a bank is also a great way for them to learn about earning interest and the power of compounding.
Creating a Balanced Budget
As teenagers seek independence, they may take a part-time job after school or on weekends. If their income supplements what you're giving them as allowance, this will give your teenager extra money to cover their expenses. When your daughter asks for a new dress for the prom or your son asks for a new baseball mitt, suggest that they prepare a budget to determine if they'll have enough to make those purchases. Help them develop a balanced budget by first listing their income, then their routine expenses, such as money for pizza and movies, and finally, the more costly items. If the results show they'll end up “in the black,” suggest that they donate some of their extra money to their favorite charity. If they'll be “in the red,” help them come up with a strategy to address the shortfall.
Handling a Credit Card
Teenagers about to head off to college may want a credit card to pay for their expenses at school. Credit card companies, however, will not issue a card to anyone under 21 unless they can show proof that they can repay the debt themselves or an adult has cosigned the credit card agreement. If you decide to take on the legal liability for your child's debt, ask the credit card company to set a low credit limit, such as $300. Teach your teenager what the grace period means and how interest will accrue on any unpaid balance. If you're uncomfortable with the idea of your teenager using a credit card, one alternative is to have your child start off with a prepaid spending card. You'll be able to load the card with a predetermined amount of money, transfer more money to the card's balance when necessary, and access account information online or over the phone.
Some of this material was prepared by Forefield/Broadridge for Tompkins Financial Advisors. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Investment Services provided through Tompkins Wealth Advisors. Trust and Estate Services provided through Tompkins Trust Company. Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC. Insurance products offered through LPL Financial or its licensed affiliates. LPL Financial is a separate entity from Tompkins Financial Advisors. The investment products sold through LPL Financial are not insured Tompkins Trust Company deposits and are not FDIC insured. These products are not obligations of Tompkins Trust Company and are not endorsed, recommended or guaranteed by Tompkins Trust Company or any government agency. The value of the investment may fluctuate, the return on the investment is not guaranteed, and loss of principal is possible. Tompkins Financial Corporation, Tompkins Trust Company and Tompkins Wealth Advisors are not registered broker/dealers and are not affiliated with LPL Financial.
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