Related: Teaching kids about money Examples of opportunity cost in everyday life And as money habits are set by age 7, the sooner they start learning, the better. “Practising making decisions, learning the benefits of delayed gratification, planning for the future, and creating savings goals are important skills for kids to learn,” says Beth Zemble, GoHenry’s VP of Education. Reinforcing the value of money and how to delay gratification, it’s a money management skill that’ll set them up for the future. Understanding opportunity cost helps children make better-informed decisions about their spending. They will also have less to put aside for trainers they’re saving for, so they’ll have to wait longer to buy them. Spending £5 on a toy now means they won’t have £5 to spend another way: on burgers and fries with friends, for example. It’s about being far-sighted, not short-sighted. Weighing opportunity cost means thinking beyond the present and assessing alternative uses for your money. What are they giving up in the future to have it now?Įxplain to your kids it’s not just the immediate trade-off you need to weigh up, it’s the long-term impact your decision will have on you. The choice isn’t just based on whether they want the toy or not. For example, say they’re deciding to buy a £5 toy. When kids learn about opportunity cost, they start to understand that every decision they make has consequences. Teaching kids about opportunity cost is important because it helps them understand the trade-offs in making decisions. Our wants are limited by supply, money, energy and time. We can’t have everything we want in life. Why is it important to teach kids about opportunity cost? The opportunity cost is always the value of the second-best choice you give up. And the same would be true if you presented them with four, five, six, seven, or a hundred choices of sweets. The third sweet is not counted as an opportunity cost. The cost of missing out on their second favourite. Their second choice is the opportunity cost. Tell your child they can only pick one, but have them name their second choice too. To demonstrate this, now hold out three types of sweets. When that’s the case, opportunity cost is the value of the next-best alternative. When you’re sure they’ve grasped this, explain that sometimes, we have more than one option to choose from. The one they didn’t choose is the opportunity cost. The simplest way to illustrate this is to present kids with a choice of two different sweets. In other words, it’s the value of the choice not taken. When you’re presented with a choice, the opportunity cost is the value of what you don’t pick. Give your children the money to count and pay for the items.Develop saving habits with GoHenry What is opportunity cost, and how to explain it in simple terms Parents can go grocery shopping and ask their children to guess and compare the prices of various items. Children are less likely to spend money that they have to work really hard for. Ask if they still need it a few weeks later. Ask them how much the item costs, discuss how they can set aside part of their pocket money to pay for the item. Let them know that things cost money and teach them how to save up. Delayed gratificationĬhildren usually want things "right now". Explore with your children if there is a more affordable option, or discuss what you would need trade-off if you were to buy that item. Let children know that your budget may not be able to afford the item that they would like to buy. Your children may ask for something just because their friends have it, or they may think that a new toy is more essential than groceries Learning to differentiate will help them make better life decisions when they grow up. So, the first step to learn about money is to know the prices of various items and how money can be exchanged for these items. They may think that big items cost more than small ones. Young children may not have any idea how much things cost.
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