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There is never a bad time to start teaching your kids about money. From a child’s point of view money does indeed grow on trees or magically appears out of pockets and purses.
As much as we tell the little blighters that there is no money tree at the bottom of the garden it is our responsibility as parents to ensure that they understand how money works.
Not just that money is earned but where money comes from, who creates money, what money can be used for and how it can be used to make their lives either easy or just plain miserable.
So, where do you start when you want to teach kids about cash? When I started to teach my kids about it, I started with the very simple idea of exchange.
The idea of exchange is simple for anyone including children to understand. To get money you must give something for it. Most people give their time and sweat labour in exchange for money. The more time and sweat they give the more they receive, or at least that’s the logic.
The problem is that there is only so much time in the day and only so much sweat that one individual can exchange for money.
The exchange can only bring in more money for an individual if the time/sweat is in doing something skilled that requires training and experience, say a lawyer, surgeon, architect, engineer that sort of thing which will take many years of dedication and practice but will pay back many times over in the future.
Teaching children about money goes hand in hand with persistence and patience. Most kids want their reward today, very few children of a young age can defer gratification, even if it is for a few hours never mind days, weeks forget asking them to wait a few decades.
When your child watches you pay for shopping with your credit card, they have the idea that all they need is the magic card and they can buy whatever they desire.
I recall having to explain to my kids what a credit card was and how it worked.
I explained to them that when I gave the shop my card that the shop computers spoke to my credit card account and took the money from a big pot of money which belonged to the credit card company.
At the end of the month I would need to call the credit card company and use my own money to fill that pot back to the top or the credit card company would make me pay extra.
This helped me explain the concepts of credit and debt.
Credit: This is when someone else lends me something which i must return in the future.
Debit: This when I own something. If I have £100 in my pocket it can be said that I am in £100 debit.
The way I explained Credit to my kids was using the time honoured apples.
If I borrow 10 apples from Jimmy today and eat them all then I owe Jimmy 10 apples at the end of the month.
I was asked why I could not wait until the end of the month, simple, I needed the apples now and could not wait until the end of the month.
In short, just like money. You can borrow money as credit, but you are expected to repay it in full.
And you can go on to explain that if you don’t return 10 apples that other people with apples will not want to give you apples in the future.
If you return the 10 apples at the end of the month then next time you need apples, maybe Jimmy will lend you 15 apples or even 20 apples because he knows that he can trust you to repay the apples at the end of the month.
This teaches children about credit and that when they borrow money that they are expected to repay the money. If they show responsibility in borrowing and repayments, they will be rewarded by the lender.
To my kids it seemed like Jimmy the apple lender was not really seem to be benefitting from his apple lending business.
So, this is where we get the opportunity to explain how interest works.
I explained now when Jimmy lends me the 10 apples, he is expecting 11 apples at the end of the month for his apple lending service.
Now Jimmy has 11 apples, the more apples he lends the more apples Jimmy gets in return.
What if you can’t repay the apples to Jimmy at the end of the month? Well, Jimmy can either ask you to repay at the end of the following month but instead of 11 apples he will now expect 12 apples.
The longer you do not return the apples the more apples you will have to return. Therefore you must repay your loans on time every time.
This is when I explained to my kids that if for whatever reason you simply cannot give back the apples then Jimmy will ask that you give him your bike or something else of value that he can then exchange for apples.
At this point all of the apple lenders will know that you cannot repay any apples which you have borrowed so they will be less likely to lend you any more apples in the future.
If they do lend to you they will lend you 10 apples and expect 15 apples at the end of the month instead of 11 because they are viewed as an unreliable apple borrower.
It is important that children understand that they cannot walk away from repaying any debts which they owe. Letting them think they can get off the hook easily will set them down the wrong financial path.
When a child sees a nice new shiny toy or game, they instantly want it. They desire it more than anything the world and they must simply have it now.
Does this remind you of anything? It’s the exact same feeling we have when we see the latest new phone, car, shoes, dress, motorbike. We lose focus and start thinking of how we can pay for it even if it means having to go without some essentials.
Instant gratification can lead to all manner of debt problems. We must teach our children that they must learn how to delay gratification. When they see something, they like that they must have the self-control to turn around and walk away and let the initial strong emotions of desire to die down.
We adults need to train our selves to do the exact same. Too many people find themselves in a lot of debt simply due to lack of self-control and the desire for instant gratification.
Believe it or not there are such distinctions. Once again very important to explain to children the difference between the two:
Good Debt: Apples which you borrow that you can afford to pay back. Rather than eating the apples straight away, you could plant the seeds of the apples so that they will grow into apple trees which will one day in the future produce apples just for you to enjoy and give shade from the sun.
I explained to my kids the function of taxes at an early age. I go to work. I earn money and each month I give some of the money to the government who will use the money to pay the policemen, teachers, nurses, fix the roads and other pubic services like hospitals and fire stations. The government makes sure that they pay everyone. Any everyone who works and earns money must give some of it to the government so that they can keep everything ticking along. Makes sense even to a 5-year-old.
When I was a kid, I used to think up all sorts of ways to make money. I sold posters of film stars, sold chocolates, fixed toys, basically anything I could get my hands on to sell I sold it.
I encourage my kids to be entrepreneurial as they can be without getting into trouble at school. (For some reason schools don’t like it when kids show initiative)
I convinced my daughter when she was 10 to go to the local shopping centers (With me in tow) and ask all the ladies at the cosmetic counters for free samples of perfumes, face creams, moisturisers and the like which she would take to school and sell to her classmates.
But again, this is exchanging time for money. So how can money work for them. I explained to them that some people would buy houses and then allow someone else live in the house in exchange for money each month.
Some people will setup up businesses which they employ people to work in that will earn them more money
Also, some people just buy bits of companies in the form of shares, keep them for a little while and if the company does well because lots of people are buying whatever the company make, the bit of the company they own will be worth more, so, they sell the bit of the company they own to someone else who wants a bit of that same company for more money than they bought it for. Again, a simple premise.
The best way today to make money in my opinion is the internet. My kids use YouTube, so they are familiar with that format. YouTubers put up videos that they watch and YouTube plays adverts during the videos. For every advert which is played the person who made the video will get a little bit of money. This means that they only have to make the video once and it will earn money while they sleep.
It is said that we British hate to discuss money. I have never understood this. The one thing that will either make or break you and we won’t talk about it. How can we understand money if we do not learn how it works and how to make it work for us?
We want the best for our children and one way we can achieve that is by having them understand that talking about money. How it works, how we earn it, how we spend it can mean the difference between a great life of financial freedom or a life of living from pay cheque to pay cheque and not taking out online loans to pay for luxuries which they do not need and cannot afford.
Debt management agencies are regulated by The Financial Conduct Authority
Many people in the U.K struggle with debts and many do not know how to start to repay them speaking to a debt advisor is one of the best things you will do along with taking action yourself by speaking directly with your creditors.
https://www.nationaldebtline.org/ and https://www.moneyadviceservice.org.uk
You should always seek professional advice when handling debt problems. Cashute are not licensed debt advisers and any information contained in this article should not be taken as legal advice. It is your Responsibility to seek out correct legal advice