At some point in a child's development, all parents wonder: how can I best teach my child the value of money? Parents who grew up in more modest circumstances than their own children can struggle to balance the desire to provide their children with the luxuries they never had with the importance of delayed gratification. What are some tools parents can use to teach money mindfulness to their children?

A Family Budget

Regardless of a family's income or asset level, there is generally some truth to the saying, "you can have anything you want, but not everything you want." By teaching your children the importance of mindfully allocating your family's resources, you'll help them develop the framework they need to make wise purchasing decisions in their teens and adulthood. 

You may not want to share all your family's financial information with your children, particularly if they tend to be prone to blurting out personal information at inopportune times. But by putting together a budget that's appropriate for their consumption, even if the dollar amounts aren't necessarily reflective of what you actually spend, you'll set the stage for a discussion of your family's spending priorities—including conversations about how just because you can afford a certain purchase doesn't mean it's a good idea. 

Visual Aids

In today's electronic banking era, it's rarer and rarer for children to see their parents pay for purchases with cash or even a check. The ability to swipe a credit or charge card to pay for purchases can leave kids more removed from the concept of dollars and cents.

Instead, rely on other visual aids to express the concept of money to younger children. For example, you can fill a sink with water (money) and then explain how your job or business provides the water and your spending allows the water to drain. While the water continues to run, you can leave the drain open without much effect; however, if the water stops or slows to a trickle while your drain is still open, you could eventually find yourself with a dry sink. 

Open Conversations

Something as important as financial literacy shouldn't be relegated to just one conversation. Parents should instead focus on ways they can incorporate financial principles into daily conversations, whether discussing the financial decisions of fictional characters in books or on TV,  playing board games like Monopoly, or involving your children in family purchasing decisions.

During the tween and teen years, parents can get a jump start on explaining investment principles, pointing out that under the Rule of 72, a dollar invested now, at a modest 6 percent return, will double every 12 years.1 A teen with earned income should be eligible to contribute to an IRA or Roth IRA up to the amount of their earned income—parents can further incentivize these savings by offering to match their child's contribution dollar-for-dollar.2 

1 http://www.moneychimp.com/features/rule72.htm

2 https://www.barrons.com/articles/roth-ira-for-teenagers-51550247933

Sources

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Important Disclosures

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy. The rule of 72 is a mathematical concept and does not guarantee investment results nor functions as a predictor of how an investment will perform. It is an approximation of the impact of a targeted rate of return. Investments are subject to fluctuating returns and there is no assurance that any investment will double in value. Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age59 ½ may result in a 10% IRS penalty tax in addition to current income tax. The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.