It is important to instil financial literacy in children to enable them to make the right money choices as adults.
However, while parents can teach children smart money habits by being role models themselves, finance experts also suggest they allow them to learn by making mistakes.
This means letting your children experience failure in money matters, but helping them to learn and recover from the error quickly.
About 45 per cent of respondents to a recent OnePoll survey of 2,000 Americans aged between 18 and 41, which looked at their financial habits, cited not saving money as the top financial mistake they wouldn’t want their children to repeat.
Another 45 per cent said spending on things they don’t need was a mistake they hope their children won't make, while 41 per cent believe that getting into debt without a plan is also wrong, according to the survey.
We asked personal finance experts to list the money mistakes that you should allow your children to make and learn from.
Lose small now, so you can save big later
Not budgeting for future expenses is what trips up many adults, so most children and teenagers will probably not budget sufficiently for their needs and wants and end up falling short sometimes, according to Smeetha Ghosh, co-founder and chief executive of Cashee, a digital banking platform for teenagers in the Mena region.
“These are ‘golden moments’ that can teach a very powerful lesson — a lesson in budgeting correctly,” she says.
“It can be very tempting as a parent to bail them out instantly. It could be better to use these opportune ‘mistakes’ made by your child to make them feel the inability to instantly gratify themselves, so they will remember to do a better job with their money in the future.”
Let them buy what they want
Let them buy what they want, even if you think it is a “waste of money”, says Will Rainey, founder of Blue Tree Savings, a company that helps parents teach their children about money and the author of Grandpa’s Fortune Fables.
“We need kids to feel empowered to make money decisions rather than controlling what they can and can’t buy,” he says.
“The key thing for parents is to follow up with their kids sometime after to help them reflect on whether they thought it was a wise purchase. Hopefully the experience will help them learn to research before spending next time.”
Rupert Connor, partner at Abacus Financial Consultants, shared how his son earned Dh1,200 ($327) by selling 40 paintings to help support his school in raising Dh170,000 to build a new institution in Nepal.
“Once we had deducted all costs, he was left with Dh860 and wanted to use the whole amount to buy Robux, digital currency of the game Roblox,” Mr Connor says.
“I allowed this as I wanted to help him learn the value of money in a few ways — not to spend everything at once so there is nothing left, to save a percentage and to not just spend mindlessly and thoughtlessly. As predicted, he ended up coming to me to ask for more pocket money, at which I told him you shouldn’t have spent it all at once.”
Let them buy things when they want
Let your children spend their money too quickly sometimes, Mr Rainey says.
If you give them an allowance and they go straight to the shops (or online) and spend it all, then let them.
The main thing for parents to make sure is that they aren’t given more money until their next allowance, he says.
This can be very hard, but it will teach them to budget their money in the future, he says.
Taking on bad debt
Living a life that is larger than you can afford could lead to situations where you have taken on bad debt — such as borrowing from friends or family but are unable to pay them back, especially if the debt racks up, Cashee’s Ms Ghosh warns.
“The big lesson that a parent could teach their child here is about the perils of loans and credit cards that can help fund habits that don’t match one’s income levels,” she says.
Create fake frauds to trick your children
As fraudsters are bound to focus on children as they become adults, parents must teach them that if something sounds too good to be true, then it probably is, according to Mr Rainey.
People under the age of 20 lost $101.4 million to online fraud in 2021, according to a recent study by cyber security start-up Social Catfish, which cited figures from the Federal Bureau of Investigation’s Internet Crime Report.
This compares with only $8.3m in 2017, an increase of nearly 1,126 per cent in four years.
“Once, I said my children could wash my car and I’d give them some money,” Mr Rainey says.
“They thought it was easy money, but what they didn’t realise is that the car was covered in dry mud and would take the most of the day to clean. They are now more cautious when being offered a deal.”
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Teach them that money does not grow on trees
It is important to help children understand that people earn money from work and that it does not just “grow” on trees, Mr Connor recommends.
Start off with a simple set of chores as this helps children make the connection that “if I do this work, then I’ll earn money”.
“If they get lazy for a weekend and do not complete the chores, then they will miss out on that pocket money,” Mr Connor says.
“Children can then set a savings goal and work towards it. It teaches them about making real-world trade-off decisions instead of giving in to instant gratification.”
Chores such as washing the car, cleaning up or taking out the rubbish create good habits in becoming more responsible and prepared for adulthood.
Lending money to friends
While parents teach children that it is good to share, what might have worked for toys when they were younger might not work when it comes to money, Ms Ghosh warns.
“It can be very tempting to help a dear friend out and lend them money in various situations,” she says.
“However, sometimes friends don’t return the money and the disappointment experienced could be a powerful lesson in encouraging kids to not mix friendship with money. When it comes to friends, disputes about money can sour or break friendships.”
How not to leave money on the table
Parents often forget to teach children to always shop around for a lower price, Mr Connor says.
Consider guiding children to make savvier shopping decisions, such as shopping at a local outlet mall to make it more cheaper, he says.
Ms Ghosh says teaching children about seasonal discounts and sales can be an early lesson in saving money.
“If your child has insisted on purchasing something for full price with their allowance, take the effort to show them how to be able to get the same product for cheaper elsewhere,” she says.
“This could be about waiting a bit longer for a sale or searching across multiple retailers and outlets and comparing prices to see who offers it the cheapest. By doing so, you can show them how much money they have left on the table by either not doing the research or by being in a hurry to get something they want.”