A child writing a budget.

Money Lessons You Should Teach Your Kid

Is it time to teach your kid about money? It is almost never too early to start teaching your kids about money and it will be an ongoing process over the years. About the time they enter the first grade is an ideal time to start teaching them, but it is never too late. If you are ready to start handing down some lessons, here are 5 things that you should teach your kid.

1) You Need To Pay Yourself First

This is one of the most important concept that you can teach your child because it will eventually be the foundation of their budget. Pay yourself first and then set your budget accordingly.

If you bring home 4000 dollars a month, you should not be living off of 4000 dollars. This is what most people do and it gets them in trouble.They wind up living paycheck to paycheck and never having enough money to save.

Instead, you should deduct 20 percent from your take home pay and put it towards savings. You then set your budget to live off of the rest. In this example, you would take 20 percent or $800 and put that money into savings and/or investments. You would then take the remaining 3200 dollars and use it towards expenses.

By teaching your child the concept of paying themselves first, you teach them how to set their lifestyle appropriately. Instead of having to adjust to the idea of saving in the future, they can understand its importance right away, and learn to live off of the right amount of their income.

2) Credit Cards Are Dangerous But Important

Credit cards are no doubt an important tool in developing credit. Without revolving credit, your score would surely suffer and, because of this, your child will eventually need to have a credit card.

Most young people tend to go crazy when they get their first credit card and this can be a major issue. Teach them early how to properly use credit cards so they do not get into credit card trouble. They should know that a credit card is not a license to spend and that plastic can make it all too easy to waste money.

One way to teach them this lesson is to put their allowance on a pre-paid credit card. The first time that they blow all of their allowance in a single day and do not have the money they need for the rest of the week, they will learn a valuable lesson.

Above all else, teach your child to take advantage of the credit perks but to never carry a balance.

3) How To Build Their Credit

Most parents fail to teach their children how to build their credit. It is an important lesson and one that should be taught early., because the earlier they start working on their credit, the more successful they will be.

The key is to teach your children what makes up their credit profile and how they can manipulate it for success. Here are the main factors they should know.

  • On Time Bill Payments
    This makes up just over a third of their score which is why it is so important to pay bills on time.
  • Available Credit
    It might seem strange for a child to have credit and not use it but keeping your credit card balances under 10 percent will yield the best score.
  • Length Of Credit History
    The one factor that you can never impact later is the length of credit. This makes it crucial to start establishing your credit history ASAP.
  • Diversity Of Credit Types
    A blend of different credit types will show a lender that a consumer knows how to handle credit.

4) The Power Of Compound Interest

The ability to save is one of the most important skills that you can give your child. Teach your children how money can grow with compound interest and they will understand the power of savings.

Compound interest is one of the best things on earth. Do the math with your child and show them how their money can grow. There are a lot of online calculators that you can use to do this, so play with the numbers.

Show them how money can double or triple in value over the years if it is left alone to grow. Compound interest is the key to making your money work for you so that you can ultimately build wealth.

5)The Importance Of A Budget

Everyone should have a budget, but sadly, too few have taken the time to create one.

Have them create a sample budget for their allowance spending. Start by having them save a portion of their allowance and then have them put the rest of their money into budget categories. Hopefully, they will see how budgeting allows them to use their money more efficiently and avoid spending mistakes.

As they get older, share your budget with them so that they can see how to save and live within their means. Budgeting is one of the most practical skills that you can teach your child because it will allow them to do the most good with their money.

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James Car is a finance, loan and budget expert based in the United States. After attending Brookhaven college, he went on to become a successful entrepreneur. He now enjoys writing articles that help people save and make the most of their money.