Children grow up to be adults. The lessons they learn as children will be carried with them as they become students, employees, husbands and wives, parents and grandparents. If they learn the lessons when they’re younger, the mistakes in adulthood are less frequent and less disastrous.
Some of those lessons learned in childhood relate to love, work, and values. You teach your child the things that are important to you and the lessons you want them to learn to be successful, happy, and productive.
Unfortunately, one lesson that’s often neglected is the lesson of money. Whether it’s because parents don’t feel confident talking about money or they don’t think it’s important, many children grow up without money skills.
This isn’t a lesson that you want to learn when you’re an adult. The consequences are too significant. They include financial stress, which can cause illness. Other consequences are debt, no savings, living paycheck to paycheck, and a life that’s more difficult than it needs to be. As parents there is a responsibility to teach your child to be money smart.
What does it mean to be money smart?
There are different components of being money smart. They include the concept of saving, of goal setting, and making your money work for you. Money smart means knowing that instant gratification isn’t always as satisfying as it might be, and saving for something you really want can pay off in ways that you just cannot imagine.
Teaching your child to be money smart means teaching them:
- About saving money
- About the importance of financial goals (long term and short term)
- How to invest their money and make their money work for them
- How to budget and allocate their money so they can pay for what they need and want
- How to leverage technology and systems to stay in control of their money
- That they’re the only person who can make decisions about their money
- About the practice of giving or donating to help others in need
- How to decide if they are going to spend money now or save it for later
- How banks work
- How to earn money and achieve their financial goals
These are some heavy lessons and in many cases they’re lessons that need to be learned over time. However, when you spend the time and energy teaching your child to be money smart, they will grow up to be confident with their money. You can trust that they’ll be able to go out into the world and stay out of financial trouble.
Why Teaching Your Child about Money Is So Important
How often do you feel stressed about money? Whether you’re trying to pay bills, save for your child’s college or your own retirement, money stress is a common problem amongst American households. There are probably steps you wish you’d taken and mistakes you wish you hadn’t made. And there is a good chance that you also hope that your child has it easier.
There are many reasons why teaching your child about money is so important.
- You want them to be less stressed about their finances when they’re adults.
- You want them to be able to live comfortably.
- You don’t want them living at home when they’re adults because they cannot afford to live on their own.
- You want them to do better than you.
Bankruptcies and Debt
Learning about money now can help your child avoid some of the biggest money mistakes that people make. Perhaps you’ve made these mistakes yourself.
We’re talking about deep debt and bankruptcy. Here are a few statistics to consider:
- Every year more than two million people in America file for bankruptcy.
- The average American household with at least one credit card has nearly $15,950 in credit card debt (in 2012), according to CreditCards.com.
- According to the Department of Education, the default rate on federal student loans has risen by about 5 percent in the past year and 500,000 more borrowers have slipped into default.
Teaching your child about money and starting when they’re young can help them avoid these unfortunate situations. No one wants financial stress and presumably no one really wants to file for bankruptcy or go into massive debt.
It happens from poor planning, overspending, and not knowing how to save for the future. These are the lessons you can teach your child now. It doesn’t matter if they’re six or sixteen; it’s never too early or too late to start.
That brings us to the next topic to take a look at – when can you start teaching your child about money and how do you go about it?
When Should You Start Teaching Your Child about Money?
You might be surprised to learn that you can start teaching your child about money when they’re two years old. While your child may be older than that right now, it’s important to get started teaching them about money as soon as possible. And it’s never too late to begin.
Let’s take a look at the concepts that you can teach your child at every age.
At this age you can teach your child about the concept of money – in other words, what money is and what it does. You can talk to them about the value of different coins and bills. You can also teach them that money is used to buy things. Playing store is an easy way to begin teaching the concept of money to young children.
Early Elementary School
At this age it’s a great time to start teaching about the difference between a want and a need. Children can help with the grocery shopping and begin to participate in decision making. This is also a great age to begin showing your child how to use a piggy bank and to introduce the concept of an allowance and working for money. By the end of elementary school they should understand saving money to buy things that they want.
Junior High School
At this age children are more than ready to begin earning money. You can tie allowance to chores or give them opportunities to earn money around the home. It’s also a good time to teach them about saving for their future and for things that they want to buy in the near future. At this age a child can also begin to learn about investing and leveraging their money.
By this time, your child should have learned some financial independence. Hopefully, they’ve had the opportunity to work for money and have learned about saving for both short-term and longer-term goals. They may have an investment account and be actively saving money for college.
Once your child is in college they will be well on their way to financial independence. Sure, you may be paying for college and helping them manage their finances. However, they should also be able to handle the majority of their financial decisions on their own.
It’s never too late to begin teaching your child about money, saving, and investing. Next we’ll talk about opportunities to teach your child about money. Teachable moments happen often; the trick is learning to recognize them.
When Should You Talk to Your Child about Money?
Teaching your child about money takes more than one conversation. Using real life situation and examples will help them pull the concepts together. They’ll learn not only from your words but also through your actions. Here are a few ideas and opportunities to talk to your child about money.
When They Receive Monetary Gifts
When your child receives a gift for their birthday or another holiday, it’s a great time to talk to them about saving some of the money. You can even help them plan how they’re going to save and what to save for.
When You Visit the ATM
The ATM is a magic box that spits out money when you enter a secret code. If only! But that’s what children might think if you don’t talk to them about what the ATM is and how it works. It’s a great opportunity to talk about earning, saving, and making spending decisions.
When You’re Shopping
Chances are that your child goes with you when you head to the supermarket and run other errands. This is an ideal opportunity to explain to your child about budgeting. You can also talk about how different items cost different amounts. You can even ask your child to help you compare prices and find the cheapest priced item.
Paying bills is probably not something that you usually do with your child. However, it’s a great time to talk to your child about what some of the things that they take for granted cost. You can talk about working and responsibilities and how you pay for these expenses each month.
It’s also a good opportunity to talk to your child about different ways to save money and why you might want to save money. For example, you can talk about turning the lights off when they leave a room and using any energy savings to put toward something fun for the family like a vacation.
Creating Your Monthly Budget
Many adults intentionally don’t talk about money in front of their children. However, in many cases that’s a mistake. When children are aware of the family finances and understand about income and expenses, it helps them envisage the big picture.
Of course you don’t want to create added stress for your child if there are financial difficulties. However, involving them in discussions about your budget helps them have a better understanding of money.
If you give your child an allowance, it’s an opportunity to talk about their decisions and what they’re going to do with the money. Depending on your child’s age you may have requirements for their allowance. For example, you may require them to donate some and save some as well.
With busy lives, it’s easy to overlook opportunities to teach your child about money. However they’re present almost every day. Take advantage of them from time to time and involve your child in your financial decisions and responsibilities to help them learn, both through words and actions, about money.
In addition to times and opportunities to teach your child about money, there are also simple tools you can use. They range from a basic piggy bank to mobile applications.
Five Tools to Teach Young Children about Money
Parents can talk and talk about money and children will only retain part of what you say. To back up the important lessons and conversations you want to teach your child through your actions. It’s also often useful if the information is experienced or comes from another source. The following tools will help you teach your child about money.
Piggy bank – The piggy bank is likely a child’s first introduction to saving money. However, simply plunking pennies into the bank doesn’t accomplish much. Consider helping your child set a savings goal. For example, maybe they can save for a trip to the toy store.
Allowance – If you choose to give your child an allowance, this is the perfect opportunity to teach about saving, spending, and donating. You can require your child to work for their allowance, give them a predetermined amount of money each week or month (which teaches them to budget their money) or a combination of both.
Books – There are a number of books for young children. One book, titled Money Mama & The Three Little Pigs by Lori Mackey, teaches the basics of money and has a positive approach.
Videos – Young children love to watch videos and Sesame Street has “For Me, For You, For Later,” a fun video about saving, donating, and spending money.
Games – Finally, you can find great online games, mobile applications and websites dedicated to teaching kids about money. Buy it Right is a board game by Learning Resources that takes players on a shopping trip and helps them learn about saving money.
Games, books, and other tools help you reinforce the message that you want to teach your child about money. They make it possible to introduce the topic of money to even very young children. Of course, children also spend a good amount of time watching what you do and how you manage your money. Next we’ll talk about teaching your child about budgeting.
Teaching Your Child about Budgeting
Budgeting is something that most adults struggle with. And it’s a simple tool that reliably helps you control your money (instead of the other way around). If you can teach your child not only about the concept of budgeting but actually help them embrace the practice at a young age, they may spend their entire adult lives feeling financially stable and in control of their money.
Imagine what a great gift that is to a child. So how can you teach a child about budgeting? There are actually a few steps that you can take and they begin at home.
Talk about Your Household Budget
The very first step to teach your child about the concept of a budget is to involve them in discussions about your own budget. Children pay attention to the actions of the people around them. It’s ineffective to talk about a budget but to not actually keep one yourself. So, if you don’t create a monthly budget, now is the time to be a good example.
And if you do, great. Now is the time to involve your child in the budget discussions. Show them your budget. Talk about how much you make and how much goes to the various expenses that they might take for granted, like utilities and food. Also show them the savings column in your budget so that they know you practice what you preach.
Talk about what you do when you have an excess each month and what you do when you spend more than you’ve budgeted. Make the family budget a family conversation. Your child will not only learn good budgeting habits themselves, they’ll also have a better understanding about your own family finances.
Give Them Money and Take Them Shopping
The next step to teach your child about budgeting is to give them money and to take them shopping. There are many different ways that you can approach this. However, it’s important that you’re prepared to manage the consequences.
For example if you give your junior high school child $200 to go school shopping there is a very good chance they’re going to mess up and buy one shirt and one pair of pants. The money is gone and now your child is left wearing the same shirt and pants for the school year. Money lessons are often learned by making mistakes.
Be sure that you are willing to follow through on the consequences. If you go out and buy your child more clothing, they don’t learn the lesson about budgeting their money and trying to purchase less expensive items so their money stretches further.
You can make it a game at the supermarket, too. Give them $20 for example, and ask them to find the items on a list and to stay in the budget. These small experiences help your child begin to realize that they have control over their financial decisions and that there are consequences to spending more than they have.
Help Them Create a Budget
When your child is old enough, and perhaps has some money coming in, you can help them create a budget for themselves. The budget might contain expenses like gas for the car, money for going out with friends, and a clothing budget. Creating the budget and sticking to it are two different things. Help your child create a plan to stick to their budget. It might require them to keep their receipts or only take out a certain amount of cash each week.
Budgeting is a skill. The earlier your child begins learning and practicing this skill, the better. They’ll be able to go out into the world confident that they are fully capable of managing their finances.
Of course, they may make some mistakes along the way. You’ve likely made a few of your own. These mistakes are teachable moments.
How to Leverage Your Child’s Money Mistakes as Teachable Moments
Money mistakes happen. You think you’re going to have enough and you don’t. You spend more than you have and then have to go without. You get into debt and then have to scrimp and struggle to pay it off. Money mistakes aren’t fun.
As adults, the consequences of making money mistakes can be high. Children make money mistakes, too. The repercussions may be painful for them; however, they’re also valuable teachable moments. Here are some of the mistakes a child might make and some ideas on how to leverage them.
- They save for a toy or item that they want and then have buyer’s remorse. Buyer’s remorse is a bummer. When your child experiences this money mistake there are a few things you can do to help them avoid this mistake in the future.
You can motivate them to always make sure they really want an item before they buy it. They can ask themselves a few questions like, “Why do I want this item?” “What do I expect this purchase to do for me?” “Is there a better way to spend my money?”
You can also help them return the item. They may not get their full money back but they’ll learn to ask for more from the items they purchase.
- They blow their allowance right away and don’t have any money to go out with their friends. Don’t bail them out. Don’t give them opportunities to earn extra money and don’t let them borrow money (this teaches them that it’s okay to go into debt). Let them miss the outing with friends. They’ll be better at budgeting their money the next month.
- They spend their entire budget on one brand name item. This happens to most children. They have money to spend, maybe from a birthday check, and they head to the store and blow it all on one item. Many children feel a bit sad when they get home and realize they only have one thing to show for their money. It’s great if you can stop them before they head to the cash register.
Point out a few items that they might like that cost less than the single item they’re buying. For example, you’re at a clothing store with your tween. They have picked an expensive sweater that they love. You point out that they can get three shirts for the price of that sweater and they’ll have more options. They can then at least make a more informed decision about how they want to spend their money.
Children will inevitably make money mistakes. If you’re paying close attention, you can capitalize on these mistakes and turn them into teachable moments. Help your child become more aware of how to manage money and how to stay in control.
Teenagers and Money – Tips
By the time a child is a teenager they will have many ideas about money. Some of these ideas, hopefully, will be empowered and smart. Others, not so much. Teenagers seem naturally inclined to take risks in many areas of their life, including financially. Let’s take a look at some tips and ideas to help your teenager manage their money more effectively, and responsibly.
- Get a Job – It can be tough for teens to find jobs. The economy still isn’t great in many areas. Additionally, they have school, sports, and other responsibilities. Babysitting gigs, mowing lawns, and summer jobs are all still an option. Getting a job helps them earn an income and that income needs to be managed and budgeted. It’s good experience.
- Technology woes – Teens no longer handle much cash. They have a debit card to work with. If they’re not careful, they can overspend and owe money to the bank in the form of bounced payments. Online shopping can cause problems too. Teach your teen that whether it’s cash or credit, the money still comes from the same place – their bank account.
- The future is closer than you think – Teens live in the moment. Next week is too far away, let alone next year or beyond. Help your teenager set money aside for after they graduate from high school. Even if their college will be paid for by scholarship, financial aid, or parents, it’s always good to have extra cash just in case. Help them look beyond their next paycheck.
- Help them invest – Teens are fully capable of starting an investment fund. Help them learn about stocks, bonds, and funds so that they can begin building a portfolio and leveraging their money. They may pout now but when they’re in their twenties and thirties they’ll be grateful for the money and the education.
- Talk about money – Teens aren’t great for their listening skills. However, they do hear you. Take time to talk about money. Leverage family budget meetings and other financial conversations to include your teen and help them get a big picture idea of adult finances. They’ll be adults before you know it and including them in the conversations can help them be prepared.
Teens will make money mistakes. As a parent you can help them become more independent with their finances. Don’t bail them out; instead give them the opportunity to learn, grow, and become smarter about money.
We’ve talked about teaching kids of all ages to become smarter about money. We’ve talked about budgeting, saving, spending, and donating money. These are all money values and to teach them, you have to be clear about your own money values and priorities.
Money Values to Consider – Saving, and Patience, Giving, Materialism
You have your own beliefs about money. These beliefs come from your parents, they come from your experience and they come from your knowledge about money. Your child will learn their money values from you. It’s important to become clear about what you want them to learn. Your actions and words have an impact.
For example, imagine you’re sitting at the kitchen table and you’re paying bills and you say, “There’s never enough.” Your child hears this and it can become part of their own money language. Do you want them to have that attitude toward money or do you want something different for them?
Get Clear on Your Beliefs about Money
What’s your money mindset? What thoughts do you have about money? What sayings do you find yourself repeating? For example, you may have grown up hearing, “Money doesn’t grow on trees.” Maybe you integrated that saying into your own life.
Write down or think about your beliefs and attitude toward money. Just because you find yourself saying something doesn’t mean you actually believe it. Explore what you believe to be true about money and what you want your child to believe about money.
Think about How You Can Model Your Beliefs
What can you do when you’re budgeting, talking about money and teaching your child about money that can support your beliefs? For example, if you want your child to believe that they can control their money and their financial situation then you can demonstrate that with positive comments about your own budget and financial situation.
You can model your beliefs by being actively engaged in budgeting and managing your money. Your child will see this behavior and embrace it as part of their own experience and belief system.
What Values Do You Want Your Child to Have about Money?
Finally, think about the values that you have about money and what you want your child to value. Some examples include:
- Saving – Saving money for short-term goals, medium-term goals, and long-term goals. How can you model this value and help your child embrace saving?
- Giving – Do you donate money to others? If so, what percentage of your income do you tithe? How can you model this value and teach your child to also donate some of their money or time to others?
- Materialism – Children and adults both enjoy buying things. There’s a balance between buying what you need and what you want. Teaching this balance is difficult. Think about your own values on material goods and how you can model the values that you want your child to have.
Children will grow up with their own thoughts, beliefs, and values about money. Empowering them now with skills and behaviors that support good money management will only strengthen their abilities as an adult. Identify what you believe about money, model that behavior, and effectively teach your child to value money in a healthy and productive way.
Finally, because a bank account is part of the money management system that every child and adult needs to have, let’s talk about bank accounts for every age of a child’s life.
Bank Accounts to Consider for Every Age
Bank accounts are part of managing your money. While you probably don’t want to go out and get a checking account for your six-year-old, there are age-appropriate accounts. Let’s look at some of your options.
Elementary Age Children
- Christmas club accounts – This short-term savings account (less than 12 months) pays less than 2 percent interest. It’s a good tool to begin teaching young children how to save.
- Savings accounts – Children can have joint savings accounts with their parents. You can require your child to set aside a portion of cash gifts that they receive. You can open an account for them as soon as they’re born and begin building a savings for them. When they’re old enough, you might consider transferring some of the money into a higher yield investment account for college.
Middle School Age Children
- Savings account – Your middle school aged child may be able to manage a savings account with a debit card. Generally speaking, at this age you want to still be able to monitor their saving and spending. A joint account may still be in everyone’s best interests. A debit card can begin to teach them about managing their money.
- Investment account – If you don’t have an investment account for your child yet, this can be a good time to introduce your child to stocks, bonds, and other investments. You can help them learn about investing and choose a good stock to start with.
- Checking Account – By high school your child should be well on their way to becoming financially independent. That means having a checking account with a debit card and all of the responsibilities that come with it. Hopefully, they still have their savings account and an investment account too.
Banking is a part of managing your money. You can ease your child into the world of banking by starting them when they’re young. By the time they’re adults, they’ll be well versed in managing their money effectively.
Teaching your child about money isn’t easy. It takes a careful plan. Opportunities present themselves in the form of your own financial decisions, your child’s mistakes, and teachable moments outside in the world. Children who learn to manage their money when they’re young, are more likely to grow up being financially savvy and money smart.