By Nathaniel Sillin
Children and teenagers who received monetary gifts for the holidays are often excited to choose what to buy. While they should be allowed to spend some of the money or gift cards, as a parent, you could also use these windfall gains as an opportunity to teach and practice important personal finance lessons.
Here are a few ideas to start with, although you can alter the message or subject matter to match your child’s experience and ability to understand the topic.
Create money goals together. Planning how your child will save or spend monetary gifts is a valuable skill and practice no matter their age. (If you don’t have a personal plan, this is a great opportunity to set an example by developing your financial path as well.)
You can start by drawing three columns — spending, saving and giving — and having them write a few goals for each. Explain the difference and importance of long- and short-term goals, and the value of having an emergency fund (for kids this could help pay for a car repair or bike tire).
Set priorities and discuss the big picture. Have them add up all they received and divide it into each column. Offer guidance to help them determine how much to put into saving and charity, taking the time to explain your reasoning.
They’ll likely find that there isn’t enough money to make a significant impact on all their goals and they’ll need to prioritize based on how important each goal is to them. Share your own experiences and how sometimes it’s better to save for a bigger and better purchase later. You could also have them calculate how expected earnings from allowance, working or upcoming holidays or birthdays could help them achieve their unrealized goals.
Decide where to store the savings. If they don’t already have one, it might be a good time to open a bank account with your children. Go over the differences between a checking and savings account and how they can store the money they received and earn. Your kids can then decide how to split their funds between checking and savings based on their goals.
Gift cards can pose a challenge, particularly if they’re store-specific cards. Children who receive them can’t deposit them at the bank, and they should take this into account as they determine which priorities they can meet and which may need to wait.
However, there are online marketplaces where they can buy and sell gift cards. How much they’ll pay and receive depends on the marketplace and the store — an example of supply and demand in action.
Comparison shop before making a purchase. No doubt children are going to want to spend some of the money right away. It offers an excellent opportunity to discuss the importance of comparison shopping.
Comparing prices at various retailers can help them find a good deal, and they should also consider several alternative but similar purchases. Being able to figure out what best fits one’s needs, wants and budget is an important skill at any age.
Discuss the time value of money and importance of saving wisely. Older children might be ready to learn about the time value of money, the idea that a dollar today is worth more than a dollar in the future.
You could discuss how inflation can decrease the purchasing power of money over time. Older children might be able to think of examples, and you can reinforce the point with images of old advertisements for 5 cent soda or gum.
The next step might be to discuss the importance of saving and investing and how compound interest could potentially offset or supersede the effects of inflation. Perhaps conclude by touching on opportunity costs, the trade-offs that come from every decision.
Bottom line: You can’t force behaviors, but you can use teaching moments to explain and practice valuable money management skills. The holidays are a great opportunity as many children receive gift cards or money, and these lessons can continue throughout the year. Try to reflect the skills and practices you’re teaching in your day to day life as well. Children can pick up on the non-verbal lessons you demonstrate as much as the explicit lessons you sit down and teach.
Nathaniel Sillin directs Visa’s financial education programs. To follow Practical Money Skills on Twitter: www.twitter.com/PracticalMoney