Teaching Kids About Money

Many adults who learn about proper money management learn the hard way. A common thread in personal financial recovery stories is a journey to “rock-bottom.” Often, a financial crisis is necessary to motivate people to change behavior, learn to be responsible for their finances, and set them on a path towards improvement. This type of trigger seems to be built into human psychology.

Many recovering drug addicts, for example, didn’t admit they had a problem until their life was so unlivable that they had no choice. The stakes when dealing with financial problems are usually not as high, but the concept is similar, and is repeated all the time.

But for kids now, it doesn’t have to be like that. If you are a parent, you can be both a model and a teacher on how to manage money and here, we’ll dive into techniques to do just that. The problem is that studies show we’re failing to teach our kids about money. Get a load of these statistics:

• A T. Rowe Price survey showed that half of parents are reluctant to talk about money with their kids.
• That translates to 8% of parents who never talk about money with their kids, while 28% talked to them about money one time a month or less (this is actually an improvement from a few years ago).
• In an earlier study, only 15% of parents surveyed actually set aside specific time to talk to their kids about money.
• Another study showed that most parents consider some money topics off limits, like family finances, parental income, investments, and debt.

One of the unintended consequences of not talking about money is that parents end up supporting their children well into adulthood. Surprisingly, Merrill Lynch found that children get more expensive–not less–with time: 79% of parents provide their young adult children with financial support. Parents spend twice as much on their adult children than they do on elective retirement savings. That’s not good for retirement, nor is it setting your children up for long-term financial success.

Clearly, we could do better. And we need to do better. Teaching kids about money should be right up there with teaching them to cook, clean, and do their own laundry before they graduate high school! Managing money well is an essential life skill. We aren’t born knowing how to fund an emergency account or how to think about our retirement goals. Kids need to be taught (or learn the hard way) everything from simple savings to complex investing. And if it’s not taught? Those kids might end up depending on you for longer than you’d like.

How do you get started teaching your kids about money?

Before we get into the age-appropriate goals, tools, and activities, there are two key ideas to keep in mind regardless of your child’s age.

First, let them practice.

Second, be honest.

Let Them Practice

Here’s what I think is the primary thing parents miss the mark on: we don’t expect kids to practice with money. We know they need to practice all these other skills we want them to learn. We’d never turn a 16-year-old loose with our car without taking them for lots of supervised driving time first. But many of our kids never have an opportunity to practice with money. Sure, they might get a few bucks from Grandma for their birthday. Or get a little allowance here or there.

What you really need is a thought-out system for giving kids the chance to manage money. Of course, for them to practice with money, they need to actually have money. We’ll get into this later in the article (skip ahead to A Note on Allowances if you can’t wait) but know that it will be hard to teach them the concepts without letting them make both good and bad decisions on their own.

Be Open and Honest

You’ve probably experienced the power of kids’ truth-telling as a parent. If you haven’t, your kid probably isn’t talking yet. Kids are incredibly perceptive and able to see through our most sophisticated untruths. Sometimes it’s easier to tell a half-truth. But it’s usually not a good idea. Nowhere is this truer than with our finances.

When your kid is with you at the store asking for yet another new toy, what’s your answer? If it’s something like, “We don’t have the money for that right now,” is that really true? In many cases, it’s not.

The bottom line here is that it’s better to be clear with your kids about the reasoning behind your financial choices. For instance, maybe that particular toy doesn’t fit well within your family’s value system. Or maybe you prefer to save extra money for travel versus buying more toys. Or maybe you’re just overwhelmed with the clutter already and know your kids don’t need more toys. Whatever your reasoning, say it, and stick with it. Unless you’re honest with your kids about your financial choices, they won’t know the way of money management.

This honesty can and should expand as children get older. Sure, it might feel uncomfortable to have conversations about investments, debt, and the family budget. But if you don’t have these conversations, your kids will be left to just figure it out as they go along.

Letting kids in on our money situations isn’t natural for most parents. It’s not how we were raised, and it can feel uncomfortable in a society where money talk is often taboo. But honest conversations and even practice sessions are a great way to prepare kids for life.

Financial Literacy for Kids

Parents can start with money lessons younger than they may think. Kids as young as three can understand basic financial concepts like spending and saving, according to Beth Kobliner, author of the bestselling book Make Your Kid a Money Genius (Even If You’re Not). Here we list out the basic concepts you’ll want to work on with your child, from young kids to teenagers. And if you find yourself reading this with a 17 year old who you’ve never talked to about money–it’s not too late! Just start with the basics.

We’ve split up concepts and activities into three age groups, but you know your kid best. Use these as a guideline for what to teach, supplementing with your own values and the areas your child shows the most interest. For the youngest kids, this is all about exposure and play. For school-aged children, it’s all about engaging with them in real-life situations. And for teenagers, think about helping them practice, with a little help from you.

Young Children – Laying the Foundation

The goal with young kids should be simple: help them understand basic concepts of saving, spending, earning, and giving. As they get closer to school age, work on delayed gratification.

Now’s not the time to break out excel. With little kids, parents should be thinking about exposure and play. If you introduce the concept of consequences, try to keep it lighthearted. You don’t want your kids to be scared of money. Below are some fun ways to engage on money.

Play:

Have them play with money. You can start teaching the difference between a nickel and a dime. Quarters are great to play with because the backs offer different pictures of the 50 states. Have kids trace the coins or put them under a piece of paper and color over it (revealing the picture below). If you have any foreign coins, talk about the differences. Make sure any play is supervised, especially with younger kids who might try and eat the coins.

Play store at home. Especially as children start to identify numbers, you can set prices for different items and let them buy or sell. You can get some supplies and ideas here.

Have kids help you clip coupons before you go to the store. You can let your child hand the coupon directly to the cashier, helping them feel part of the process.

Another fun activity is to play restaurant at home. You can help your kid design a menu, listing out the prices for each item. Help them put together a simple meal (like a sandwich) and remind them to ask for the money at the end. You can get some supplies and ideas here.

Little children love music. If you see a street musician, take the time to stop and allow your child to take in the moment. Then ask if they want to give any coins to the performer. Over time, your child is likely to ask if they can have a few quarters when they hear music they like.

Help your little ones learn about saving by using a clear jar–not a colored piggy bank–to store their money in. If you want the advanced version of this, use three jars instead, labeled with “savings,” “spending,” or “giving.” (It helps to label them with different colors and reinforce what they each mean, since most children aren’t reading at this age). Set aside time to talk about what’s in the jar–pour it out and count it with your kids.

As they get older, help them set a goal to save up for a big purchase–big here being something they have to work to save up for, but not so long off that it seems impossible to your little one. That timeline will be different for each child, so use your parental instinct to figure out how long that is.

School-age Children – Practice with Some Real World Consequences

The goal with this age should be to give them the tools to practice saving and spending with a bit more autonomy. The choices they make need to feel real and “high-stake.” In kid terms, that could be a cool new pair of kicks, a toy they want, or a video game.

You’ll want to reinforce the concepts learned earlier and work on introducing the difference between “wants” and “needs.” This lesson can be related to advertising (when kids see an advertisement, ask them what the company wants them to do–hint, the answer is always “buy stuff.”) This is also a great time to introduce the concept of compound interest.

Engage:

The message between want and need can be reinforced in everyday life. When we shop, we expose them to our values. Do we give into impulse buys whenever they ask? Here’s a good time to start talking about why we might not want to make that purchase, or at least give ourselves time to think it over for a day. If you value things like organic groceries, talk about why you might choose to buy something even if it’s more expensive. If you buy the generic brand of cereal, explain why you made that choice. You can even give your kids a “budget” of a few dollars for the grocery store (putting whatever nutritional parameters on it you need) and let them figure out what they want to get.

Children of this age have a sense of social responsibility and fairness. Parents can talk to their kids about the value of charitable donations. A great activity is to set aside money for your kids to donate and help them research charities. Then let them decide how to allocate the money. You can also try this as a gift alternative for birthdays or holidays (even if it’s just one less present that your child gives/receives, you can talk about the impact the money made).

If your child has already been saving her money in a jar, reward them with a special trip to the bank. Open a bank account with no-fees and no minimum balance. Then follow up with your child and encourage them to keep saving.

Here’s where you can introduce the idea of compound interest.  Compound interest is a concept even many adults don’t understand. But it’s one of the most powerful financial forces out there. If you want to start young, when you dole out allowance every week, you could give your kid a nickel for every dollar that’s still in their jar. They’ll pretty quickly see that it doesn’t take long for the nickels to make another dollar, which earns even more nickels.

But once kids are in this age group, it may be best to leave this lesson to the bank. With that savings account you helped them open, encourage them to regularly deposit their allowance. Then, help them calculate how the interest will grow over time.

Is bank interest not high enough for you? Help kids buy bonds or a CD. These are great options for mid-term savings. They could be especially helpful when kids are old enough to start thinking of saving for a car. That extra money from interest will come in handy when it’s time to start car shopping!

Teach them the fundamentals of borrowing early. You can also practice compound interest with kids on the flip side. Giving kids interest-bearing loans from the Bank of Mom and Dad can be a helpful way to make them aware of the problems with taking on debt.

If they don’t have enough in allowance to buy a toy they want, extend a loan but charge interest. Then, keep an amortization table showing how much of their money is going towards interest each month and how much interest they’ll pay over time.

Teens and Young Adults – Preparing for Independence

With your children quickly heading off into the world, the goal with this age should be to prepare them (as best you can) for financial independence. That doesn’t mean you are cutting them off at 18, but it should mean they have all the tools they’ll need to make good decisions (though of course they won’t always make good ones).

During this time, children will be able to handle more responsibility and should be encouraged to learn how to wisely use money-management strategies, including responsible use of a credit or debit card, monitored by the parents. But you’ll want to work with your kids to help them understand, set, and stick to a budget.

Practice (with help):

With big expenses on the horizon (like college or a first car), now is a great time to reinforce the ideas of compound interest through practice investing. This will allow them to see what it’s like to take risks with their money. One option is the SIFMA’s Stock Market Game. It essentially lets your child invest pretend money in the stock market, where they can make investment decisions and see what might happen to their money.

The game is pretty realistic, including the ability to invest in mutual funds and the concept of commission fees on trades. Kids can see what it might be like to invest money and how they could easily lose what they’ve invested–or gain great returns.

This game is meant to be played as part of a team. It’s a great way to get your whole family involved in an interesting game that they can also learn from.

By ninth grade, start talking to your child about the cost of college (you can use this College Scorecard to compare costs, employment prospects, and how student loan debt will eat into future earnings). Be honest with them about what you can afford–and more importantly what you can’t. Go over the costs of different colleges and look at what students earn after graduation.

You’ll also want to start preparing them to understand financial aid. Help them work through what they qualify for and what that means they need to pay. It might be more than they expect, just like this woman experienced.

Talk to your kids about how much money you earn–both now and when you first started your career. Print out a pay slip to show them how much money goes to health insurance, to state and federal taxes, and to your retirement account. This can be a huge–and hard–lesson to learn at your first job and is something that will help your teenager understand their future take-home pay.

Now is also the time to talk about different types of debt, credit scores, and taxes.

Get Advanced with Micro-Investing:

Investing in this age is so much easier than it was when we were young adults–and so much more accessible! All you need for micro-investing is your smart phone and about $5 to get started. Apps like Public, Stash and Acorns are where you’ll want to begin your search for the perfect micro-investing tool. The best part is you and your kid can watch their tiny investment grow into a good chunk of money over time. It’s a great visual to encourage them to continue investing.

A Note on Allowances

There’s no right way to tackle allowances. Your family should look at your own finances and values to decide what’s right for you. But without an allowance (or a part-time job), it will be hard for your kids to get the practice they need to succeed later as adults. Here are two ways of thinking about allowances:

Option 1: Commission-Style Allowances

This option has been popularized by Dave Ramsey. It posits that kids should be expected to do basic chores just because they’re a member of the household. You don’t get paid just for existing, so why should your kids?

So instead of a set allowance, kids get paid a certain amount of money to do particular chores. Each chore has a value. When they do that chore, they get the money for it. Then, they can do what they want with that money, within whatever limits you set.

This option is good for older kids, I think, who want to earn above and beyond what you’re willing to just hand over to them. However, it has its weaknesses. For instance, what if kids don’t have anything on their wish list? They’ll just stop doing extra chores because they don’t need money.

Option 2: A Set Allowance

This is an option I’ve read about elsewhere, but the book The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous, and Smart About Money by Ron Lieber really solidified it for me.

Lieber argues that kids should get an allowance for just being a part of the family. They should get enough money to make decisions that feel fairly high-stakes to them.

The advantage of this option is that kids can practice earlier and more often with money. Also, since you’re just handing your kids money, you can reasonably expect to have a little more control. Lieber suggests having kids split the money into spending, saving, and giving categories. (To be fair, Dave Ramsey also advocates a similar approach with categories.)

But with this higher allowance comes higher expectations. For instance, you might just stop buying your five-year-old toys or treats at all outside of birthdays and holidays. She’ll have to use her own money when she wants something, which is an incredibly valuable lesson.

As kids age, expectations can increase. A middle-schooler should be able to manage his or her own back-to-school clothing budget. And a high-schooler should be paying for his smartphone, for instance.

Books

There’s no shortage of books telling you how to teach your kids about money. Here are a few books we like:

The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous, and Smart About Money by Ron Lieber

Make Your Kid a Money Genius (Even If You’re Not) by Beth Kobliner

Smart Money Smart Kids: Raising the Next Generation to Win with Money by Dave Ramsey and Rachel Cruze

The Bottom Line

It’s never too late to start teaching your kid about finances, even if they’ve left the house. But if you have the chance to start when they are itty-bitty, take advantage of it! Your retirement account will thank you.

If you have experience with this, what worked well for you (and what didn’t)? Let us know in the comments.