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Raising Financially Savvy Children

May 10, 2010

| MoneyRates.com Senior Financial Analyst, CFA

America has a chronic problem with debt. The national debt is soaring, and things are not much better at the household level. Household debt burdens rose through much of the last decade, and while they finally started to ease a bit during the recession, they still are at higher levels than at any time during the 1980s or 1990s.

How can America break its debt habit? One strategy is to start early with the next generation. By teaching children both good savings habits and an understanding of the value of saving, parents can help them avoid some of the financial hardships the nation has struggled with in recent years.

The Birds, the Bees, and Money Market Accounts

Basic financial skills taught in a one-time lecture aren't going to stick. Children pick up many habits from their parents. If you want children who live within their means and pay their bills on time, the best thing you can do is show that you live by those principles.

In addition, there are simple ways you can encourage children to solidify financial habits that will last a lifetime:

  • Have your child set a budget. It's fine for children to have latitude about how they spend their money, as long as they learn to develop a plan for what they want to spend it on. This will help them anticipate what their purchases will cost and understand the trade-offs that spending decisions represent: trade-offs between different items and trade-offs between today and tomorrow.
  • Start a savings account for your child. Savings accounts or money market accounts are ideal, because they pay interest without locking money up for a long time. Look for banks that offer savings accounts or money market accounts specifically for children, which typically have no minimum balance or maintenance fees.
  • Encourage your child to make deposits regularly. Over time, this habit will help them see how good habits can make an account grow.
  • Talk to your children about your experiences with money. For older children, the more they understand your financial situation and the lessons you have learned through the years, the more they will have realistic expectations about how a family makes ends meet.
  • Explain the difference between needs and wants. If you're in the store and your child says he or she "needs" the latest new toy, explain that the item is most likely a "want." Encourage children to save up for an item they really want--this can be great motivation for them to add more to that savings account you've set up.
  • Link allowance to specific chores. Money will be less of an abstract concept if children associate it with the effort needed to earn it.

MoneyRates.com can also help you teach children effective financial planning by illustrating various attributes of CDs, savings accounts, and money market accounts. Teach them the long-term impact of earning different savings rates--older children can grasp the concept of compound interest--and then show them the benefits of shopping around for the best CD rates, savings account rates, and money market rates.

Revisiting MoneyRates.com with them periodically can demonstrate how frequently these bank rates change with macroeconomic changes.

Teaching financial literacy is an important parenting responsibility. The earlier children begin to learn better savings habits, the more useful your legacy of financial savvy will be to them.

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