One of the reasons I decided to start a personal finance blog is that I feel so much disappointment that we don’t teach our future generations about money in our formal education system. When I started learning in-depth about personal finance, the more I learned the more I realized I didn’t know…and wanted to know…and wished I had learned much earlier!
Learning to create a budget, track expenses and the power of compounding investments are much, much more valuable tools in the vast majority of our lives than biology or chemistry. People are much more likely to need to know how to use a loan amortization table than they are to use the periodic table (I haven’t looked at one since high school for sure…).
While I hope someday that it will be incorporated into our formal education system, in the meantime it is completely up to us to educate our children about money matters. I have young children at home (my 3 kids are 8 and under), so this is something to which I’ve just started giving a significant amount of thought. Perhaps I’ll pass along my love of budgeting to one of my children (ha!).
The best ways to teach kids about money are to incorporate the learning in everyday tasks and to take advantage of opportunities that come up that allow them to make money decisions.
I’ve given a lot of thought to whether allowances should be given based on doing chores or just simply as a learning tool without attaching them to chores. Ultimately, I’ve chosen to give my kids their allowances without other strings attached. Their regular chores are expected with no additional reward beyond the satisfaction of contributing to the family (I’m sure they are inwardly joyous although outwardly not so much). Don’t worry if you can’t afford to give your child very much for an allowance. Even a dollar a month for a young child can teach them valuable money lessons.
Kids should take responsibility for keeping their money in a safe spot and if they lose their money, parents shouldn’t jump in and replace what they’ve lost. It’s tough love, but that’s how you learn to be responsible.
THE LESSON: Taking responsibility for decisions regarding handling and spending money.
Starting a savings account when your children are young will reinforce the importance of savings. Encourage your kids to deposit part of their allowance and other earnings into their savings account for the future. They might be saving up for something as small as a new baseball bat or a new book, but it will teach them that sometimes you have to wait for things that you really want.
For very small children, it may be more advantageous to start a savings jar instead of opening a savings account. This way, they’ll be able to visually see their money grow.
THE LESSON: Delayed gratification & saving for something instead of using credit cards.
As I mentioned above, my kids are often able to earn extra money through doing additional jobs around the house. There are times that my daughter is just a little short on being able to buy something she wants and will offer to do some jobs to earn that last little bit that she needs more quickly. Extra jobs around my house usually entail cleaning walls and baseboards, scrubbing floors and folding laundry. How much you wish to pay your little ones is up to you, but I usually pay them around 25-50 cents per job, depending on how long the task takes.
In addition, something like a lemonade stand can teach them about how a business works. If you provide the ingredients and supplies, having your kids pay you back for them out of their income can teach them a valuable lesson about starting a business. Not only is a lemonade stand a ton of fun, they’ll learn to handle and count money as well.
Several months ago, we passed a group of kids selling their pearler bead creations near our home and my kids begged me to stop so that they could buy some. They happily used their allowances to buy several treasures from this little “shop”. You can’t get any better than kids teaching kids about money and business.
THE LESSON: Working hard for your money and hustling when you want to earn more income.
A child’s version of setting financial goals may simply be deciding what they want to spend their money on, but it’s a great start being intentional with finances. Setting goals is the first most important thing that I advocate in personal finance and the earlier it is learned, the better. Goals give us something to work toward and encourage us not to spend on certain things so that we can spend on things that are more important to us.
One way kids can set a goal is to define a portion of their income they want to save (such as 10%) or a portion of their income they want to give to others. A young child can simply put money in their savings account or savings jar with the goal of purchasing a new toy or going to the movies when they’ve reached a certain goal amount.
THE LESSON: Setting financial goals to encourage living their best, intentional life.
In conjunction with setting goals, children need to see the impact that smart personal finance will have for them in the long-term. Involve your kids in seeing accounts that you’ve started for them grow, or in helping to start the accounts if you don’t currently have any. For example, show them (or start!) their 529 education savings plan or Coverdell savings account. Even a small deposit into these accounts on a regular basis will help them get excited about the power of saving.
In addition, it may help your kids to be excited about getting Christmas and birthday gifts to these accounts from grandparents or other family members instead of more toys.
THE LESSON: Learning to save for the long-term and seeing first-hand the power of compounding interest.
Avoid entitlement. Enough said, right? While I’m grateful to live in a place and time that my kids can even feel entitled, it’s a constant battle to teach them gratitude. There are always others to help and those opportunities are the most apparent right now during the onset of the holidays.
Whether it’s sending money to a charitable organization, buying a gift for a friend, or purchasing items to directly give to a community cause, kids will be able to learn what it feels like to use their money to help others in need. Involve them in charitable causes that you are already contribute to. There is unlimited need in the world and there are unlimited ways to help kids learn to give.
THE LESSON: Being charitable with money and learning gratitude.
When you are purchasing a gift for a birthday party your child will be attending, you can involve them in a small-scale budget by giving them a set limit to spend on the gift(s). We all know that kids need limits and money limits are certainly no exception. Using cash is ideal in this situation so that they don’t feel there is flexibility to go over the set budget amount. Slightly older kids can help even more with party budgets, holidays budgets and others that include several different components.
THE LESSON: Learning to budget for expenses instead of arbitrarily spending money.
If I was limited to giving only one piece of financial planning advice to anyone from children up to adults, it would be to track your expenses. This is so simple these days with apps that automatically pull in transactions from your bank and credit accounts, yet most people still don’t do it.
I personally would love to know the breakdown of what I spent money on as a kid – I can tell you that it was probably mostly candy. Young kids can just use a piece of lined paper and write their purchases down so that they can see where their money is going. If they have a savings account, they can use the ledger provided by the bank so that they feel super financially savvy.
THE LESSON: Learning to write down expenses over time to be able to determine the usefulness of the things that they are spending money on.
Think of some ways that you actively participate in saving your household money. It could be clipping coupons, buying store brands groceries or making a menu plan that takes advantages of current sales. How can your kids help you with these tasks?
Simple, honest conversations are also important that include why you don’t spend money on certain things in your house (for example, why they don’t have all the newest video games that the kids down the street have or why you don’t have all the cable channels in the entire world…like the kids down the street). Also talk to them about what things you spend money on instead that you feel make your life better than the alternative ways you could be spending your money. It goes back to MAKING YOUR MONEY MATTER (shameless plug for my blog here!).
THE LESSON: Learning to keep certain expenses low to be able to stretch your month further and maximize savings.
Instead of giving in to your child’s pleading for a toy at Target, teach them to save their own money for the item or ask for it as a Christmas or birthday gift. In addition, encourage them to play with and take care of the toys they already have and minimize buying toys that are similar or just the updated version that has essentially the same function.
There is always going to be something bigger and better that you want to buy. It’s true for little kids and it’s true for big grown-up kids (like husbands). Unfortunately, this lesson is generally taught the hard way when young adults first move out and decide to buy everything they ever wanted with their new access to credit. The sooner kids learn that money doesn’t grow on trees, the better off they’ll be for the rest of their lives.
THE LESSON: Learning that you don’t need to have everything that money can buy and that always wanting more material things will bring dissatisfaction and unhappiness.
Money is such a great tool that can be used in our families to build secure, content and less stressful lives. Modeling good financial habits for our kids and proactively teaching them through daily experiences can benefit generations. As the quote goes “To teach a child is to touch the future.” Isn’t creating the best future possible for our child really what we want as parents?
How are you teaching your child about money?