Teaching your children about money is one of the greatest lessons on life that you can teach them. Just think how wonderful it would be if our children didn’t have to learn the lessons about money the hard way like we did.
While my parents were great examples of living frugally, they didn’t teach me about the nuts and bolts of money. My parents never talked to me about money or finances. Family finances were not to be discussed with the children. As a result, my brother and I had to learn the hard way by making mistake after mistake.
None of us were born with the knowledge or experience on managing money. This life skill must be learned. If it isn’t learned from our parents or at school, we’ll learn it the hard way by arriving at the doorstep of financial chaos … and potentially financial failure. So, lets start teaching our children about money so they’ll have a good start at understanding how money works when they reach adulthood.
Teach them to save (Ages 3 and up)
A great way to start teaching your young children on how to save and the benefits of saving is to give them a glass jar to put their money in for saving. As money is added to the jar they can see that putting money in starts to fill the jar. They can also see that the money in the jar gets smaller when they pull money out to buy something. This is a critical life lesson and must be experienced by the child to learn it.
Teach by example (All ages)
This starts by the parent(s) having their own finances under control. If you, as a parent, aren’t responsible about your money, how can you possibly teach your kids? You can’t. Your children will learn more from your actions than from your verbal instruction.
When there are money troubles in the household your kids will know it. They see the stress. They hear the fights about money. When the family finances are in chaos, all aspects of the family are in chaos.
It is important that you let your children observe you making bank deposits, paying bills, writing checks and reconciling monthly checking account and bank card statements. Let them see and be a part of your monthly budget process. This type of instruction needs to be age appropriate according to the child’s ability to understand.
Show your kids that “stuff” costs money (Ages 3 and up)
Take your child shopping with you and let them see you pull out actual money from your purse or wallet to pay for the purchase. Afterwards, tell your child how many hours you had to work to pay for that purchase. This is a lesson that cannot be effectively taught by using a bank card. It just doesn’t have the same visual and instructional affect.
Next, you and your child need to withdraw money from that child’s savings jar to buy an item your child desperately wants. Have your child put the money in his/her pocket and head to the store to buy it. Have your child actually pull the money from his pocket and hand the money to the cashier at the checkout.
Let your kids know the cost of spending (Elementary and Middle School aged)
Let’s say your daughter wants to buy a new outfit. Since she will be using her own money to buy it, you will not try to stop her. However, you should point out that once she buys the outfit she wants, she won’t have enough money left in her savings jar to also buy the jeans she wants so badly. She will have to choose which she wants the most. This is a life lesson on budgeting.
Compensation for work vs an allowance (Elementary and Middle School aged children)
I am a firm believer in not giving a child a regular allowance. I believe that a child needs to learn that money comes from work performed.
Performing work = Earning money
Set up a chart of chores and how much you will pay for that chore being done correctly. As the child’s need for money increases, the chart is updated to reflect an increase in the compensation for the chore performed.
These chores should be over and above the shared household chores performed by everyone in the household by being part of the family. Of course, compensation is not paid for performing family-shared chores.
This lesson teaches the distinction between work being performed for money and work being performed as a (voluntary) contribution to a social unit which in this case is the family.
Planned vs impulse buying (Elementary and Middle School aged children)
Encourage your child to make conscious planned purchases rather than impulse purchases. Encourage your child to “sleep on it” before buying an item if it costs more than $10. If the child still wants it tomorrow, that’s fine. The point is to teach conscious consumption.
Thrift / Frugality (Elementary and Middle School aged children)
Take your child with you when you go shopping at thrift stores, garage (yard) sales or even an auction. Give them a few dollars to spend. Let them experience the benefit of thrifty living. This teaches them that there is an alternative to buying everything new and that you get more from your money by buying a used item that is in good condition.
Sharing a portion of income to others who need it (Ages 12 and up)
Once your child is earning some money, it is important to teach them about sharing a portion of their earnings with those who are in need. It may be friend, another student in their school or someone on their soccer team that isn’t as “well off” as most others. This person isn’t able to have the nice clothes, the new smart phone or able to eat the expensive snacks that everyone else eats. Your child knows this person, she’s the one everyone picks on and bullies. She’s the one that is always by herself because none of the popular girls will associate with her.
Have your child do or give something nice for this other child … preferably anonymously. Teach your child to be the friend of the friendless … and lead by example.
Satisfaction, contentment and being grateful Ages 12 and up)
Children are bombard by advertisements and peer pressure to have the latest electronic gadgets, the newest fast-fashion clothes, the new popular brand and style of sneakers, and the list goes on and on.
We need to teach our children that new, better and more doesn’t mean better and doesn’t bring happiness. Our kids need to understand that the having last year’s style of jeans and smart phone is good enough if the clothes still fit and are in good condition and to remind them that the smart phone they currently have was the “must have” phone last year.
Children need to be shown, through their parents’ example, that being content with what we have when it still meets their needs is okay and is the best way to live our lives financially. It is also good for our planet because we are not living our lives in a continuous, never-ending loop of consumerism that is destroying families and our planet.
Keep in mind that our kids learn from our example. If we, as parents, are buying a new smart phone every year or two and are buying new cars at the same rate, our kids will see the conflict between what we say and what we actually do.
Saving for a purpose (Ages 12 and up)
Have your child open a savings account at a bank or credit union. Credit unions are notorious for encouraging kids to save money and typically offer a special “kids” saving account for the purpose of teaching about the importance of saving.
Once your child has a job and is earning an income from an outside source, the child needs to learn how much of his earning should be saved. The amount to be saved should be a minimum of 10%.
So, at this point your child will have two types of savings:
- A savings jar in which the child can withdraw from
- A savings account for a long-term (5 years or longer) purpose like college or buying a car. Your child needs to understand that they cannot take money out of this account.
Investing (Age 15 and up)
Due to the lack of education and practical experience, most adults know nothing about investing. To make matters worse, investing frightens them.
Once a child is earning money from a job, usually at age 16 or so, they should increase the the amount he is saving from 10% to 15%. The additional 5% should be invested … not just saved because, based on current pathetically low average interest rates on savings accounts, you cannot earn enough interest on your money to meet savings goals. So, your child will have three types of savings:
- Savings jar that acts like a checking account for buying things
- Savings account for long-term saving objectives
- Investing for long-term growth through increased valuation and dividends
You and your child, based on his needs, can determine how much of his total money allotted to savings should be distributed to each type of account.
For investing, a mutual fund account with Fidelity with no annual account fees, no minimums to open an account, great value for trades, and no transaction fees on thousands of funds is a great way to get your child to start investing.
Note: The Frugal Plan blog, its owner and/or its contributors do not recommend or endorse any companies or products. Any named companies or products are for informational purposes only.
Credit Cards (Age 18 and up)
Once your child is 18 they will be targeted by credit card companies … especially if they are in college. Review the pitfalls of debt with them and show them the effect of only paying the minimum amount due on high-interest credit cards. Remember….
Those who understand compound interest … earn it.
Those who don’t understand compound interest … pay it.
Budget (Age 18 and up)
Once your child goes to college or moves out on their own, assist them in developing a budget. Review with them why it is so important to have and follow a budget throughout their entire life.
We, as parents, cannot stop our children from making money mistakes. Some lessons must be learned by making a bad financial decision and then working their way through it. The best we can do is to prepare them to make sound financial decisions as an adult.
What things have you done with your children to teach them about money?