Teaching Kids About Money

Your children have been soaking up knowledge from you since the moment they were born, right? You’ve helped them learn how to talk, how to read, how to hit a baseball and ride a bike and kick a soccer ball and why they need to look both ways before they cross the street.

In other words – how to survive and thrive in their new world.

But have you taught them about money? That won’t be your first priority with a newborn, of course, but it could and should move up that list sooner than you might think as your kids are growing up.

Research from the Consumer Financial Protection Bureau tells us that children are “developmentally capable” of saving money at age 5. Allowances are fine, according to the study, but the real benefit comes with parental guidance on saving, budgeting, and spending. It creates habits that allow them to manage their finances effectively when they become adults.

The more they know at an early age about what it does and how it works, the more successful they’ll be at managing their resources as they move toward and into adulthood.

Teaching Kids How To Budget

Just as you help your young child develop skills such as reading ability, behavioral habits and motor coordination, you can foster financial literacy for your kids, along with a sense of responsibility and self-reliance, by introducing early lessons about money and budgeting.

In the here and now, they might not recognize the long-term benefits of the budgeting wisdom you communicate to them when they’re young. But among other concepts, these basic budgeting principles will help them develop positive financial skills that will pay off later in life:

• Teach them the difference between wants and needs.
• Make sure they understand how they can earn money.
• Once they earn it, set goals for them to save it.
• Offer them incentives such as matching donations to their own savings.
• When they make a mistake with their money, be sure they learn from it.

The most obvious, and probably valuable, lesson your kids can learn is that the money they have (not to mention the money their parents have!), isn’t unlimited. A budget, even a rudimentary one, will help them recognize that they need to make choices, not only about what they can do with what they have, but also about how much they need to save to get what they want.

Think that understanding won’t come in handy as they grow up?

Teaching your kids about budgeting doesn’t have to feel like homework. If they have $20 to spend on toys, for example, you can talk them through the decision to buy, say, either one Walkie-Talkie set at $20 or four Hot Wheels cars at $5 apiece. Or you can present a third alternative: Save the money until he or she has enough for a $37 Blast Off Multistage Rocket. Yes, we’re channeling our own interests from when we were kids here (and the exercise feels like fun even now!); your child will have different preferences.

As a way for younger kids to see how far money will go, make a game of it, using beads or buttons they can put into either an ‘income’ jar or an ‘expense’ jar. Then discuss why and how the number of tokens in each jar goes up or down over time.

When they’re a little older, let them have input on your own budget for groceries or an upcoming vacation. Explain the difference between expenses that are essential and expenses that might go for fun food or activities and let them suggest how to allocate the money. That way, they’ll have some ownership of the decisions that get made in the family.

» Learn More: Budgeting Tips for Young Adults

Ways to Teach Kids About Saving and Spending

If nothing else, there is one very valuable tool that provides a wonderful financial education for just about any age. Create three jars — labeled “saving,” “spending” and “sharing.”

When a child receives money for a birthday gift or earns money for chores, the money can be divided equally among the jars. The spending money can go for smaller items. The sharing money is for charity. The saving money should be accumulated to purchase more expensive items. As with any meaningful exercise, a child learns how to save money by making good choices.

According to financial experts, teaching kids to save is more than just an option. It’s essential.

“We have to make sure the next generation is well-equipped, and parents must set an example. They must teach kids about money,” said George Washington University professor Annamaria Lusardi, one of the nation’s foremost authorities on debt management and prudent financial practices.

She thinks too many parents are counting on schools, employers or even peers to teach personal finance education and that is not going well.

“If you leave it up to other parts of society, such as the employer or private sector, it’s going to be a very unequal process,” Lusardi said. “Learning through mistakes is costly and inefficient. Children should be taught the right way at a young age. They will become financially responsible adults and avoid so many problems.”

So, what else goes into developing financial literacy for kids? How can kids be encouraged to save money? It isn’t as difficult as you might think. Here are some tips.

1. Set a Good Example

Imagine the conflict created within a child’s mind if they are told they have to be frugal while they see Mom or Dad buying cars, electronics or clothes on a whim and falling into careless debt by over-spending with a credit card. Maybe worse, consider the effects on a kid when he or she knows their parents are arguing about money. Being a positive role model is important when it comes to finances just as it is for every other way you help your child mature. It’s good to explain spending decisions to a child, such as the difference between a need and a want.

2. Start Them Saving Early

If you give your children an allowance, you can start the lessons about the benefits of saving right there. Let them know they don’t have to spend it right away every week or every month. Explain how saving it, or at least some of it, can make the amount they’ll have at their disposal grow for when they want or need to use it for something bigger. That can work for when they receive money for their birthday or the holidays, too. (Saving monetary gifts for something specific makes for a thank-you note the gift-giver will especially appreciate.)

The habits they form when they’re saving money as a kid are likely to carry over to young adulthood when they’re out on their own. They’ll already know the how’s, the why’s, and the value of a nest egg.

3. Use a Clear Jar for Savings

You want your child to see his or her money grow. Don’t underestimate the benefit of the positive reinforcement that comes with being able to watch as the pile of dollars and cents gets bigger every time a coin or bill gets dropped into a clear savings jar. It’s a big deal, and you should point that out. That can’t happen if the money is being hidden away in a conventional piggy bank.

4. Show Them How Money Works

You know the cardinal rule of effective storytelling, right? Show, don’t tell. You’ll engage your children much more thoroughly if the money lessons you give them are tangible. For example, let them see the pricing label on something at the grocery store, and then have them hand over the cash at the counter and watch the cashier make change.

Show vs. Tell is the difference between simply saying something might cost more than he or she ought to pay and taking that amount out of the savings jar and showing him or her how much will be left after the purchase.

5. Use an Allowance as a Learning Tool

Does an allowance have to be free money for your kids? A gift every week or month to be spent in whichever way the child desires? That’s how it works in many families. But a no-strings-attached allowance doesn’t do much to teach kids about money even if the child eventually will learn some trial-and-error lessons about how far a weekly allowance will go and how much it will buy.

When you tie an allowance to a set of expectations, you open the door to lessons about budgeting, prioritizing, financial responsibility, and more. The expectations can involve guidelines about how long you expect the amount you’re providing to last, or whether your child needs your permission to spend it, or if a certain percentage of the allowance has to be saved or donated to charity, or any other ‘strings’ you and your child agree on together. Many parents tie an allowance to the expectation that their kids will earn it by doing chores around the house. By making the availability of an allowance a negotiation between you and your child, you are building his or her financial management skills.

6. Teach Opportunity Cost

“Opportunity cost” is a phrase from the world of economics which essentially defines the value of what you lose when you choose a different option. It makes for a difficult question for anyone, even an adult, who has to decide between two or more attractive alternatives. What do I lose if I take this job over that offer? What will I miss if I rent an apartment in the suburbs instead of a loft downtown? How much will I regret going out for drinks with my friends instead of staying home to get some work done?

Children face decision dilemmas, too, and you can help them navigate the process when it comes to money. You don’t have to use the phrase “opportunity cost” (why make this harder on your kid than it needs to be?) to teach them that their financial choices have consequences. You can help them understand that if they spend their money on something they want today, they won’t have enough to buy something else they could want even more tomorrow. As a parent, you might explain that you’re saying ‘no’ to your child about a money matter right now because it could help get to a ‘yes’ sometime in the future.

7. Open A Kid-Friendly Bank Account For them

Take your child to the bank and open a no-fee savings account for them. This is another ‘show, don’t tell’ opportunity. Don’t just do it for them and tell them about it when you get home; let them be there as an active participant in creating the account. You might need to shop around for the right bank with the right kind of catering-to-kids program that offers no-fee accounts and no minimum balance requirements. Once it’s in place and your kid is familiar with the environment, he or she should be more inclined to save some money there. Dealing with their own account is a great way for them to develop money management skills.

8. Explain Credit and Debit Cards

It’s never too early to point out the uses of financial products, such as the difference between credit cards and debit cards. It might be good to give your child a debit card during his senior year in high school and tell them it has to last through all their spending for a month. It might also be good to let your kids know about the debt dangers of a credit card, because they’ll start getting those solicitations as soon as they set off on their own. By then, they should know how a debit card works and, if they’re ready, they can take on a credit card.

9. Give Your Child Responsibility

A lot of these tips will teach your children how to care for their own money, as well as how to understand why you care for your own finances. Explaining opportunity cost, for example, will help your kid learn to make smart choices. Understanding the expectations associated with getting an allowance will build his or her sense of obligation. However, and whenever you give your child some ownership of their lives, you are improving their ability to become independent thinkers. The more you teach your kids how to choose their own course of action about money, even when you believe the choice they’re making might not be for the best, the more you steer them toward an understanding that their financial decisions have consequences. That’s a vital piece of knowledge to have as they grow older.

10. Help Them Set a Budget

You can do this for your kids at any time during their childhood when they have their own money from an allowance or from birthday or holiday gifts. But it’s especially valuable when they start earning a steady income either with part-time work during their school years or their first full-time job. It doesn’t have to be complicated; there are only a handful of basics involved in how to make a budget. A simple spreadsheet that itemizes income and expenses can encourage healthy financial habits, and there are plenty of budgeting apps that make those two columns easy for your mobile-phone-savvy children to follow.

The sooner kids learn how to use a budget to manage their money, the better equipped they’ll be to plan for their future, save for the big purchases that come with adulthood, allocate funds for emergencies and avoid the kinds of credit-card debt spirals that can ruin lives.

11. Saving for College and Student Loans

Maybe you should be sitting down before we tell you this next bit of information. Are you seated? Good. Here it is: The average cost of college in the United States in 2023 is $36,436 per student per year, according to the Education Data Initiative. Over four years, that’s a total of $145,744. So yeah, it makes all the sense in the world to ask your teenager to do his or her part to pay some of that book-learning freight. If he or she is making money from a part-time or summer job, it can be done easily enough by setting up a college savings account and making sure a percentage of every paycheck is routed into it. Not only will it help your pocketbook when it comes time for your kid to matriculate, it will also give your student a sense of ownership of his or her advanced education.

Still sitting? OK, you might want to stay there a minute or two longer. Here’s another number from the Education Data Initiative that might take your breath away: When you factor in the interest you or your child ultimately will pay if you take out student loans, the total cost of a bachelor’s degree can be more than $500,000. Bottom line: Be very careful about taking the student-loan track to get through college, even if it can help get you in the short term. Make sure your children know that student loans can drag your (and their) finances down for years long after that framed sheepskin diploma has been hung on the wall.

Some quick pros and cons of student loans:

Pros:

• When there is no other way to pay for college, they’ll help you afford it.
• They’re generally available to students even if they have little or no credit history.
• Often, the interest rates on student loans are lower than on other financing options.

Cons:

• Expect the monthly repayment bill to be anywhere from $200-300 or more a month, which can get in the way of a lot of post-graduation expenses.
• Defaulting on student loan payments will crater your credit score.
• There are annual limits on how much you can borrow with student loans. Even if you take it to the limit, it might not be enough to cover every college expense.

12. Explain Investments

Delayed gratification can be a difficult concept for a youngster, but the benefits of accumulating compound interest sometimes click with a kid who might equate a short-term sacrifice with earning “free money.” So a talk or two (or three or four) about investments is a good idea when your child is old enough to understand that there are things he or she can do with money to make it grow. Where to start? Maybe by comparing the risks and rewards of investments to something they already like to do, such as climbing a tree or waiting to see a shooting star.

If they’re already savvy enough to know about stocks, you can share your own track record with an investment over time, especially if you own stock in a company to which they can easily relate like Disney or Apple. And if you and your child have a few extra dollars burning holes in your pockets, let him or her invest it with you and together you can watch what happens as the stock becomes more or (hopefully not) less valuable. Eventually, your kid will learn the benefits of diversification, asset allocation, financial responsibility and other lessons that will come in handy as they grow up.