How to Teach Children About Money
When my children were young, they would say comments such as: “Just go to the bank and they will give you money”....“You have more checks; that means you have money”....or “The credit card still works”. These were telltale signs that they had much to learn before they ventured out on their own to manage their finances. Teaching your children how to handle money is one of the most important jobs as a parent. Children need to learn where money comes from, and it’s up to the parents to teach children smart financial habits. Financial education begins at home.
When asked "What do you think is the biggest mistake parents make when teaching their kids about money?" Warren Buffett answered, “I think parents need to start teaching kids about the importance of managing money at an early age. Sometimes parents wait until their kids are in their teens before they start talking about managing money when they could be starting when their kids are in preschool.” Source found here. Most experts agree that financial education should begin as early as 4 or 5.
Some of the financial lessons that I have taught to my children include the following:
- Money doesn’t grow on trees.
- Money is earned, it is not given freely, unless it is a gift.
- There is a difference between want and need.
- Needs: food, water, shelter, love, support, etc….
- Wants: candy, toys, fancy clothes, etc…..
- Responsibility is key.
- Doing chores
- Earning money
- Making decisions on how to spend their money
- Live within your means.
- If they spend their earnings on a purchase and don’t have enough left for something else they want, that’s a good opportunity for them to experience the consequence of overspending.
- Delayed gratification pays off.
- Tell your kids no every once in a while.
- They will never forget how good it feels to work toward a goal and be rewarded in the end.
- Good things come to those who wait – waiting pays off.
- Debt cannot be taken lightly.
- A promise to repay debt is a serious matter, and defaulting on a loan of any kind risks grave personal, financial and legal repercussions.
- Save money for big purchases.
- Don’t spend it as soon as you get it.
- Manufacturer’s sales tricks.
- False sense of urgency
- Everyone has one
- This product will make you happy
- The difference between good debt and bad debt.
- An example of a good debt is purchasing a house. It will likely grow in value and so will the equity.
- Examples of bad debt are exotic vacations, fine wining and dining, name brand clothing, and expensive cars. All of these might boost your ego, but do nothing for your net worth.
As children grow so should their responsibility with money, budgets, and financing. There are three age categories when considering how to determine appropriate guidelines: Pre-school/Elementary, Early Teens, and Late Teen/Young Adult. Listed below are some things to consider for each of these age groups.
- Teach them about money and currency. Explain what coins are worth, what the different paper notes are worth.
- Allowance – start with small projects helping to empty the dishwasher, making bed, sorting stockings, setting the table.
- Use three clear jars for their earnings. One jar for saving, one jar for giving, and one jar for spending. Clear jars allow them to see their money grow.
- Open a bank account for your child later elementary years.
- Let them pay for items themselves.
- Before you go to the grocery store, have them help clip coupons.
- Chores might include: taking out the trash, mowing the lawn, cleaning their room, responsible for making a meal during the week, or laundry.
- Continue the lessons of saving, giving, and spending.
- Lend your young teen some money to make a big purchase and give them a deadline to repay. Let them know that if they are late in paying there will be an increase in what they have to pay.
- Help them find smaller outside jobs such as a paper route, babysitting, mowing other people’s lawns, walking pets, ect…
- Do some comparison shopping at the grocery store with them by looking at the size and price of products. Talk about generic brands.
- Have your child pick out some stocks and record what happens to the value over a period of 6 months – 1 year
- Turn day-to-day activities into learning opportunities. Trips to the bank, making purchases at stores, and discussing how commercials trick us into wanting something we really don’t need are all perfect opportunities for age appropriate discussions.
Late Teen/Young Adult
- Give them the responsibility of a bank account. Help them reconcile the monthly statement.
- Help them find a job.
- Get them a co-signed credit card and teach them the dangers of credit cards. When they turn 18 they will be hounded by credit card companies. Parents need to know that there is an emotional disconnect with using plastic to pay for items, so it’s important to spend some time teaching the concept of credit. Help your kids understand that their credit record can have a lasting impact on their lives. It will be taken into consideration when they want to get a loan, buy a car, rent an apartment, get a job, or buy a house. Parents can also pass on financial lessons by giving their children a safe place to make mistakes. It’s better for kids to experience consequences in a loving environment rather than from a credit card company. Rules for credit cards should be:
- You should charge only what you can pay back each month
- Charges should be paid back on time to avoid any late payment charges
- Pay bill in full to avoid any, and very expensive, interest charges
- A small car loan is smart for their first vehicle. Two ways to build a credit score in the US, include car loans and credit cards. It can be very beneficial to build a credit score before they need it. Note: this might work differently outside the US, depending on where you live.
- Share aspects of your fiscal responsibilities with your children – the details of your mortgage, how car loans work, the type of investments you have, how you pay bills each month, your budget, most likely you will cultivate in them a deeper appreciation of your prudent and careful handling of the family’s assets and liabilities.
Learning about money starts in the home, and children need to learn how to handle money in order to become self-sufficient, independent, responsible adults. Teaching your children about finances is one of the most important jobs parents have. There are specific lessons depending on the age of the child and remember, as children grow so should their responsibilities. Leading by example is the most influential way parents teach their children. Parents need to remember that no matter their age; your children are watching you. It is so important to lead by example--by living within your means, keeping debt to a minimum, saving for the future, and giving to charitable organisations. Invest in your children, start young, and you will help them create a financial legacy that will be passed on to their children for generations to come.
Julie is Mom to 4, Grandma to 8, Business Owner with over 30 years of experience, including that as a financial controller to several companies. In her spare time, she loves to quilt, travel, and help her children think of new business opportunities.