11 Top Tips To Teach your Kids About Money
We’re going to explore the best way for parents to teach their kids about money, and when, how and why they need to do it. We all want the “best” for our kids, we want them to live a life free of financial stress, with the freedom to follow their passions rather than be forced to hold a job they don’t enjoy, simply to make ends meet.
But if that’s the case, why are there so many kids in dire straights these days? I believe there are a few key reasons, each with solutions of how to address
- Their parents were not sure of what the “best” truly is and they inadvertently ended off track
- They have grown up without a roadmap for managing their finances and without an understanding of just how important money management is to living the life you want to live
What is “best” for our Kids?
Many parents work tirelessly trying to provide what’s “best” for their kids, many time sacrificing their own interests, to put their kid’s first. They fulfill their children’s every want, way beyond their actual needs. Whether it comes from a desire to give them what we lacked in our childhood, or merely a hope to give them a wonderful childhood, or a fear of confrontation and wanting to keep the peace, in any case it often backfires.
Unfortunately, this can often have the opposite affect on our children, causing them greater struggles in the future.
Why Buying kids what they want is not good for them
When we buy our kids everything they want, they adjust their perception of what is “enough”. This can lead to bigger and bigger expectations. Children who get everything they want:
Instead of raising happy, independent children with high-esteem, many parents realize their children have grown up incapable of facing disappointment, depressed and unable to function as adults.
Ok, so that got dark quickly, so let’s pivot and talk about how we avoid that path!
How to Raise Kids That Are good With Money and Life
Remember, how successful your children are with money will be determined by you – as they’re not going to get this knowledge in school (which is one of country’s biggest failures).
Most young people aren’t getting an education in the fundamentals of financial independence, such as budgeting, savings and investing. According to the Council for Economic Education, in 2022 just 23 states require students to take a class in personal finance to graduate from high school.
However, its comforting to know your child’s success isn’t always determined by your degree of wealth, or whether you sent them to the ‘best’ schools, its simpler than that. It’s really up to us parents to teach them the basic principles that will play an important part in their future success.
Even if you didn’t learn about money from your parents, or a mentor, or your job, you can still teach these fundamentals to your kids and build a strong foundation. Just follow a few simple rules.
Rule #1 Start when they are little
Rule #2 If you missed the boat on rule number 1, not to worry, it’s never too late to start!
Many of my readers voice a great deal of regret saying they wish they had learned the fundamentals of money management earlier. Entering college or the workforce with a solid understanding of money management can give kids a real advantage. They’re more likely to find a career they enjoy, save for life experiences that promote happiness, and retire earlier.
Remember, 75% of all the time you spend with your kids will occur by the time they are 12. So ask yourself, “what am I doing now, to prepare my kids for their future?”
How to start teaching basic money management to young Kids (5-6 years old)
The three foundational steps to teaching young kids about money are earning, saving and sharing.
1. Teach them the value of money
An allowance is a good first step to teaching the value of money —especially if you tie at least part of it to jobs that teach responsibility. However, it is not recommended that allowance be tied to regular household chores the child does as part of the family. It’s best to teach our children that everyone in the family pitches in. Otherwise they’ll end up being like my horrible college roommate, Debbie, that drove everyone crazy because she never picked up after herself, didn’t want to pitch in on utilities and split the cost of a pizza by how many slices she ate. Don’t let them be a Debbie!
Instead, agree with your child which chores they are expected to do, perhaps making their bed, clearing the table, feeding the pets. Then, allow your child to choose additional jobs (not chores) they would like to do to earn an allowance. Giving your child the choice to choose the job, will increase engagement and is more in line with how things will work in adulthood.
Allow your child to select jobs he or she wants to take on, in order to earn allowance, and keep them separate from household chores they do as part of the family.
Earning an allowance introduces kids to the value of money and making choices for themselves. Most kids, my daughter included, make a very different choice with her own money than they does with someone else’s. She will often ask if she can have something and as soon as I reply, “yes, you can buy it with your own money,” she reconsiders its value and ultimately declines. In these instances, she is clearly calculating the value of the object based on how long it would take her to earn the required funds.
Parents vary on the ideal amount of allowance to give, with many settling between 50 cents and $1 week, per each year of age.
In our home, our daughter earns $7 a week and she is 12 years old. She has chosen her jobs to be emptying the dishwasher, doing the laundry and taking out the garbage bins. This is in addition to her household chores of making her bed, keeping her bedroom and bathroom clean, setting and clearing the table, and looking after her pets.
The amount of money given is far less important than the notion that a child must practice taking responsibility for financial decision-making with whatever quantity of money is given.
Remember that while his/her counting skills at this age might still be developing, the important skill you want to teach here is building a strong connection between working and earning income.
This is your new mantra with your kids…”If you don’t work, you don’t get paid.“
Here are some ideas for jobs suitable for younger children. Let them choose which they want to do as “chores” and which they want to select as “jobs” to earn an allowance.
It should go without saying, but I’m going to say it anyway – if they don’t do the jobs, the don’t get paid! I’m actually a little more strict when it comes to this one, as I want to mirror the real world as much as I can. In the real world, you can’t just not show up for work one week and expect to keep your job. I knew the temptation would be there for my daughter to just skip some weeks, especially when she had built up a big enough stash and didn’t actually need any more money. So I implemented the rule that if jobs are not done one week, she needs to actually pay me to do them – in these rare instances, she has had to take her own money and pay me to complete the jobs! This has successfully kept instances of her “not showing up for work” to a minimum.
2. Automate savings
Encouraging your kids to save for the future, either short or long term, teaches them the concept of delayed gratification. Make a routine of setting aside a portion of every dollar they receive, including allowances and gifts, for their savings fund. Automate the process so the money is put into savings simply and continually.
Have your child automatically save a portion of ever dollar received, to get them in the habit of saving, just like they’ll need to when they’re grown.
In our home, our daughter has put away 50% of every dollar she has ever received as gifts, or earned in allowance. The percent that works for your family may be different, but the lesson is the same. Saving a portion of your income mirrors real world experience and is a great habit to start at an early age so they’re not inclined to blow their whole paycheck when they’re grown.
We have selected a high interest online savings account to deposit her funds. It’s currently earning 4.35% at the time of this writing. Don’t use a brick and mortar bank as they offer mere peanuts and you won’t be able to teach them about the magic of compound interest. We have the account set up in our names and manage it for her.
You can also explore custodial bank accounts. Many of these charge fees, that can eat into our child’s savings, which is why we have chosen a no fee, high interest savings account and simply make deposits on her behalf.
3. Encourage your children to give back
My daughter is encouraged to give a portion of her earnings to charity. She has chosen to do this out of her allowance. In our example:
- She earns $7 a week for completing her jobs
- She keeps 50%, or $3.50 a week
- The remaining $3.50 is allocated into two buckets
- $2.50 is automatically sent to savings
- $1 is automatically sent to charity savings account.
I have set up automatic payments into 2 separate online savings account, one for her and one for the charity of her choice. They are all with the same online bank, which allows us to set up multiple sub account for each savings goal.
When the balance gets high enough, she gets to decide how to use her charity funds. Sometimes it is buying holiday gifts for kids, or toys for our local animal shelter, or supplies to make cards for the nearby retirement home. It changes all the time, but is always a charity of her choice.
These 3 simple steps have allowed our daughter to learn to Earn, Save and Share her money wisely.
How to Teach Money Management to 7-10 year olds
After your children have learned the 3 foundational steps to money management, they’re ready to take it to the next level, through entrepreneurship and budgeting.
4. Introduce them to concept of entrepreneurship.
No one ever introduced me to the idea of working for myself when I was young. It was always ingrained that I would go to college and get a traditional job with a company. I worked in banking for over 30 years, always content to work for someone else. It wasn’t until my 50’s that I enjoyed the benefits of working for myself. I was so surprised at how much I enjoyed running me own business and how much it energized me.
It’s no different for kids. Loads of kids have some amazing business ideas, that should be encouraged from a young age. 17% of students today in the US operate their own business. And the entrepreneurial trend is growing among kids, with 60% of teens wanting to launch their own business instead of working a traditional job, according to a 2022 survey from Junior Achievement.
You can help foster your child’s interest in developing their own business using these suggestions as they build out their business plan.
5. Show them how to build a budget
If you child has the entrepreneurial spirit, then a budget for their business idea is a great place to start. However, If your child is not keen or ready to start their own business, there are still plenty of ways to show them how to build and use a budget. In our family, we love to travel. Last summer I took my then 11 year old to London and Paris as an end of school treat. We went with friends who also have a 10 year old. We explained to the girls that we would cover airfare, hotel, food and transport, but they would need to pay their own way for any activities they planned to do.
It was amazing seeing how much fun they had building their budget in Google Sheets. They researched activities in each city, and found out what each cost. They then made a list and worked together to cull it based on expense. They determined that the cost of going up the Eiffel Tower was not worth it and decided to experience the tower from the ground. The money they saved was put toward a dinner cruise on the Seine.
In another instance, they opted for standing tickets for Shakespeare’s Globe for only 5 pounds vs assigned seats at 25 (as an adult I put a far greater value on my comfort than they do and would have made a different decision to save my back!). These are just a few examples of how we watched them assess how long they’d have to save for each experience and then select their favorite. After spending nearly $100 dollars on the ABBA Voyage concert I asked her if she had any regrets – to which I was greeted with a resounding NO! That was a big spend she was initially hesitant about, but I assured her you can’t go wrong spending money on experiences. And we all agreed.
How to introduce money management to tweens
6. Set them up with a bank account
By this age, they have likely outgrown saving their money in jars, wallets, socks or ziplocks. You’ll want to consider opening up a youth account for them. Make sure you use some strict criteria when evaluating your options.
- No fees at all. No account fees, no ATM fees, no transaction fees.
- Easy access to your money
- A high interest rate on savings (at present, north of 4.3%)
If you can’t find a youth account that meets these criteria, you’re likely better off keeping the funds in a high interest online savings account in your name, and simply providing the cash to your tween when needed.
I explored a number of popular options, including Greenlight and could not justify the monthly fees as I only have one child. It may be worthwhile for larger families as some have a set account fee no matter how many children are on it. If your child needs to access the funds, prepaid debit can also be a good option that may have lower fees than an account with more features. Typically, accounts will charge more for accounts with multiple features, so ensure they are features your child actually needs and will use.
7. Show them the Power Of investing
Once your kids have saved some money, you can consider opening a custodial brokerage account for them to learn about investing. Your child can learn the importance of researching and managing their assets and can gain a sense of empowerment. There may be unique tax considerations for custodial accounts, so it’s best to work with your accountant or advisor to find the appropriate solution for your situation.
Fidelity offers a Youth Account for 13-17 year olds to allow them to manage and invest their own money, and it claims to have no fees. For the teens, the app allows them to organize their savings and learn to invest. For parents, the app comes with interactive lessons for kids as well as parents to help guide important money conversations at home.
Work with them, but let them choose a few stocks or funds to invest in. Then, encourage them to review the performance regularly. Kids can become very engaged when it comes to investing in a company they know and like and can see the performance.
If your child is not interested or ready for investing in the market, you can still show them the power investing has on building their savings. Introduce them to the magic of compound interest.
Show them the magic of compound interest. Explain how their savings account is earning interest, and explain how this interest earned is added back to their account, allowing them to earn more interest every month. See how much a $50 monthly investment can add up to over time, with a conservative 5% annual growth rate.
Or, chart out your own savings rate with this calculator.
Sadly, only about 40% of high school students surveyed recently by the JumpStart Coalition for Financial Literacy had a savings account. Your child needs to understand the bigger picture of money management, which is largely about saving.
8. Warn them about Credit
There is no better person to warn you about the dangers of credit than someone who made a career out of selling credit cards! Before I wrote about personal finance, I ran credit card businesses for major banks including Citibank for over 30 years. And I am telling you, with no exceptions, insist your child make a pact that they won’t ever get a credit card.
You know how Steve Jobs didn’t let his kids use iphones and ipads, because he knew the dangers? Same thing here. A career credit card marketer is telling you, don’t ever let your kid get a credit card!
There is zero reason for them to obtain one. Don’t let them tell you they need one to rent a car, or build credit or earn rewards
FACT:
- You can rent a car with a debit card
- You can report your utility payments to the credit bureaus or become an authorized user on someone else’s account to build credit
- The rewards you earn are peanuts in comparison to the fees you pay
Read about the evils of credit cards if you need more reason to steer your kids away from credit cards.
Remind them that the compound interest they just learned about, works both ways and that any debt they incur will grow exponentially over time.
9. Encourage them to Be Frugal
As a parent, it’s important to practice what you preach on this one and lead by example. As a family, we only buy used cars, we donate to and shop at used book stores, and resell all our old toys. So my daughter is not surprised when we always head to our second hand children’s clothing shops before we buy new, and have often found my daughter’s favorite outfits there. Typically, they’re filled with name brand clothes we’d never pay for new, but are happy to pay for at a significant discount.
My daughter loves knowing she can buy much more for much less in a second hand shop. As a bonus, when she resells her used toys, she gets to pocket the money herself, encouraging her to cull and not accumulate clutter.
Don’t buy what you don’t need and your kids will pick up on this behavior. Talk to them about consumerism and marketing and how and why companies send messages to them with an aim to make them feel they ‘need’ a particular product.
Teach them how not to get sucked into marketing. Make ‘scoring deals’ the name of the game and something to be proud of.
10. Show them its Okay to talk about money
Money should not be a taboo subject, but sadly, in many families it is. Not talking freely about money as a family leaves too many unanswered questions and breeds a fear of asking for help.
In our home, we talk about money freely, at the dinner table, in the car, on vacation and where ever else it comes up. It’s okay for our daughter to have a sense of what things cost, and listen to how her parents make decisions regarding money. Kids pick up a lot, and you’d rather they pick up knowledge than a sense of fear or stress about money.
Our daughter is often included in our decision making process when appropriate. We have chats about things like what kind of car we should get (she’s pushing for a white Tesla). But after talking through the features and pricing, she now understands we wouldn’t have space to take all her friends with her to camp. We discuss where to go on family vacations, and the overall cost involved, and sacrifices we’d have to make and agree on whether or not it’s worth it. One year, we splurged and went to Hawaii for Christmas. We all agreed in advance to pass up a lot of activities that year in order to save up for the things we wanted to do in Hawaii, like snorkeling with turtles and kayaking with whales.
Continually look for teachable moments to talk about money. For example, the arrival of your monthly card bill is a perfect time to explain that credit can actually cost money, in the form of interest, if you don’t pay your bill in full every month!
11. Give them a big dose of perspective
Most parents aim to give their children a life a bit better than what they had. When you think about what it means to “want a better life for your children,” it tends to be rooted in some desire to provide opportunities that you didn’t have growing up. Maybe it’s graduating from college, having a high-paying career, or even something as simple as not having to worry about where your next meal is coming from.
The fact is, it’s difficult to appreciate what one doesn’t have to work for. If your kids are lucky enough to have a sturdy roof over their head, warm clothes on their backs and food on the table, that makes your job as a parent that much harder to help them appreciate it.
In our family, we use genealogy to help us with that task. We have documented the lives of our ancestors and their colorful stories dating back generations and hundreds of years. We share those stories with our daughter so she has a real understanding of the genuine hardships and tragedies her ancestor endured.
The stories are fascinating and really capture the imagination from those who first settled lands and faced daily skirmishes with native Americans, to those that built entire towns from scratch, and sadly those who lost loved ones to tragic diseases of the time. She learned about relatives that sailed on convict ships to new lands at the age of 16, never to see their family or homeland again, all for stealing a loaf of bread.
She has learned that closets were not common until the early 1800s, as people didn’t have enough clothing to warrant more than a wardrobe or chest. Yet today, many people feel the need for massive closets to store more clothes than could ever been worn in a year. So no, she doesn’t “need” her fav sneakers in 3 different colors.
Both my grandfather’s worked two jobs, one in the daytime, and one over night to provide for their families. My daughter is well aware of this and appreciates how lucky she is to be born in a time where her parents can work and still have quality family time.
She is learning that the best things in life require dedication and work. Something about the fact that these stories are of her ancestors makes a stronger connection than something you just read in a history book.
Not everyone has a love of genealogy as strong as mine. But that’s okay, as there are plenty of other ways to help your kids appreciate what they have.
Remember, a good dose of perspective does wonders and a little bit of hardship never hurts.
So, be careful in wishing your kids “never have to experience what you did growing up” as some of those same experiences you want to protect them from, could quite possibly have made you the successful person you are today.
Dr. Angela Lee Duckworth, Assistant Professor of Psychology at the University of Pennsylvania, and author of “True Grit: The Power of Passion and Perseverance” (a very interesting read), agrees, She concludes that the number one predictor of future success – both academically and professionally is grit. And grit is gained from faith in achieving long term goals in spite of frustrations and failures.
So let children start working, earning, saving, and investing when they are young. If they encounter obstacles along the way, that’s okay!
Let’s prepare our children for the road, not the road for our children.
Jonathan Haidt
Know that a lifestyle focused on financial literacy for your children will help to build a strong foundation for their future success. While one that gives into their every desire will end up hurting them in the future.
LIVE RICHLY. FIND HAPPY.
Up Next:
Before you know it, your kid will be ready for their own job. This comes with a whole host of new concepts, such as education, careers, training, bosses, salaries, taxes and more. But that’s a story for another time, so watch this space.
READ MORE About Living Richly:
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