If financial literacy were taught in educational institutions as well as it is taught by the school of hard knocks, then parents wouldn't have to worry about their kids learning about money. But because experience is typically the way most people learn best, and in finance that can be expensive, perhaps a few lessons about money might save the kids - and you - a few bucks.
Specific money lessons are easy to find. You'll often see information like 10 tips on taxes, five ways to find a mutual fund and seven ways to save money. But what's missing is a way to make decisions. An overall way of thinking about money so that decisions aren't based on a set of rules that can change, but on a set of guiding principles. With that in mind, here are three things to teach your kids about money.
1. Money is Stored Work
If you think of money as stored work, decisions about saving and spending become much easier. Would you spend the weekend working in exchange for that toy? By framing the question like that, the relationship between cost and value becomes much clearer. Without an understanding of value, how can a kid make a choice? They just want everything because money has no value.
When it's your stored work the kid is spending, the toy isn't valuable. But when they have to do chores for two full days to pay for it, or even just know how much you have to do to pay for it, all of a sudden you may have a little miser on your hands.
If you're having trouble with the concept, remember that the reason we need to use money is because the barter system is unwieldy. No one wants to trade chickens for corn because our options would be limited to what we could make ourselves. We use money to facilitate the transaction so we can all have chicken and corn, but trade our skills in exchange for it.
Also, by teaching them about money as stored work, you are teaching them about work. Once connected, the two things allow decisions to be made about school, careers, skill building and more. This should drive home more lessons than just how to balance a check book. (Teach your kids the relationship between work, money and achieving financial goals with these five simple lessons in 5 Money Skills To Teach Your Kids.)
2. Money is Time
Frame your choices in the increments of the time it takes to do the work to make the money and you'll change the way you see the situation. If you have money, you don't need to spend time working. If you don't have money, you need to work and that takes time.
For adults that have money, you can pay someone to cut your grass, clean your house or cook your food. If you don't have money, you need to spend time doing that stuff. If you have some money and enjoy gardening but not cleaning you house, then the decision becomes obvious.
Also, if you have the opportunity to make money, perhaps by working overtime or a side job, and you make more doing that than you would spend to have someone mow your lawn or clean your house, then that decision becomes obvious as well.
But when you frame money terms of time for your kids, decisions can be dramatically different. Ask a child which they would prefer you do, work long hours and have a nicer car, house or vacation, or spend more time with them and drive a clunker, rent an apartment or stay home on vacation.
Money frees you from doing things you don't want to do and allows you to spend more time doing what want. It's helpful to be very clear on what you want and what they want. (It can be hard to talk about money with your children, especially when times are tough. Here are some tips to make it easy in Talking About Money When Times Are Tough.)
3. Money Has a Life of its Own
Think of your money as your employee. If you put your money in the bank, it goes to work for you earning a small paycheck (interest). It's a steady job, but a low wage one. You could put your money to work in a higher paying job like the stock market, but sometimes people get fired from that job, so there's more risk.
Often people put some money into many different jobs, but regardless of where you put your money to work, it's your employee and you get to tell it what to do.
The decision to put your money to work, perhaps so that you don't have to, becomes more obvious when you compare the money earned from a job and the money earned from other money. Even young kids can see that if you had enough money working for you, then you wouldn't need to work. Adults call this retirement, but I bet lots of kids would just call it cool. (These simple tips will help you raise financially savvy kids. Check out Help Your Kids Understand Money.)
The Bottom Line
By framing the choices about money in this way, its value can represent its impact on you and your child's life. This makes money decisions easier because they aren't about some obscure concept called money. They are life choices about things that everyone can understand. By understanding the value of money, you can hopefully avoid some of the lessons from the school of hard knocks.