Teaching Children About Money – It’s Never Too Early to Start Learning Good Money Habits

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Money Conversations with Children
I have long advocated having financial conversations with your kids. It’s important to give your kids an idea of how to appropriately manage money, and talk to them about how you handle your finances — as well as what you wish you had done differently. However, it might be difficult to talk with kids about…

I have long advocated having financial conversations with your kids. It’s important to give your kids an idea of how to appropriately manage money, and talk to them about how you handle your finances — as well as what you wish you had done differently.

However, it might be difficult to talk with kids about money. In fact, it remains one of the taboos of our society. Chances are, though, that your children want you to talk to them about money, and give them advice they can trust. The Millennial Money Study from Fidelity takes a look at some of the realities of kids and money and should provide you with some food for thought if you’ve been reluctant to talk to your kids about money.

Personal finance and related topics are subjects I don’t think our school systems focus on enough, which leaves financial education up to the parents or the child’s initiative.

Money Conversations with Children

When Should You Have “the talk?”

My daughter is too young to understand money, so we have been able to avoid having “the talk.” You know, when your little one asks you for the first time, “Daddy, where does money come from?”

An uncomfortable silence fills the air and for a second you think you can get away with changing the subject. But your child asks again and you know you can’t stall forever.

OK, I’m joking, but money is an abstract concept that isn’t always easy for children (and some adults) to understand. I think the best way to teach children the concept of money is with hands-on experience starting at an early age.

Your Kids Trust You For Financial Information

The Fidelity study found that 33 percent of millennials identify their parents as the most trusted source financial information. Additionally, 59 percent of millennials think that their parents are good financial role models.

While that 33 percent number might not seem like a ringing endorsement, it still represents the highest rating. Millennials are more likely to trust their parents when it comes to money than they are to trust financial gurus and others. Indeed, the next highest trusted source for financial information is “no one,” at 23 percent.

It’s also telling that many millennials recognize their parents as good financial role models. Clearly, there is a chance that your children see what you are doing with your money, and admire you for it. This means that you are probably having more of an impact than you think. Your kids trust you to know what to do with money, so it makes sense that you should do what you can to help them make the best possible decisions with their finances.

You Should Talk About Money More Frequently With Your Kids

Study after study shows that parents should talk with their kids about important subjects if they want to have an impact. This includes money topics. Unfortunately, according to Fidelity’s study, 49 percent of millennials say that they haven’t received financial advice from their parents. This is a problem. Most kids aren’t going to get financial help from school curricula, so you need to make sure that you are providing good advice.

You can start to talk to your kids about money when they are young if you want to transition naturally to a situation in which they can come to you for advice. Here are some tips to start talking about money more with your kids:

If you establish a rapport early on, and if your kids know they can come to you with money questions, they will be more likely to learn to manage money effectively and make better choices with their money.

How Can You Get Children Involved at Home?

You can involve your children with money at almost any age. It can be as simple as explaining purchases when you are out and about. For example, you can make it a point to help when you check out at the grocery store or you pay for a meal at a restaurant. You can also involve children with money by giving them their own money to use for saving, spending, and giving.

Talk About Money in Your Home

teach children good money habits
It’s never too early to teach children good money habits

You can have money discussions where your children can hear you. Discuss the pros and cons of different purchases, saving up for certain items, avoiding waste, and other good financial habits. Make it a point to ensure that money isn’t a taboo topic in your home.

At the Grocery Store

From weighing produce and determining what the cost will be, to keeping track of coupons, to comparing name vs. store brand, to keeping a running total throughout the trip, the grocery store provides you with a wonderful opportunity for your child to hone his math, money, and budgeting skills.

Making a game of the grocery store with younger children by challenging them to find a cheaper alternative or add up prices quickly will make the financial education fun.

For older kids and teenagers, allowing them to take the list to see if they can spend less than budgeted (without sacrificing any of the needs on the list) will inspire them to be savvy shoppers—particularly if you let them keep the difference between what they spent and what you budgeted.

When Paying Bills

The monthly bill-paying chore is hardly anything you would call fun. But when kids are small and want to do everything Mom and Dad do, it’s an ideal time to teach children about money.

Allow children to see how much money you have and how much must go out to pay bills. Let them practice their addition and subtraction skills to help you balance your checkbook.

If you still pay bills by check, put the kids in charge of double-checking that you have all the necessary information in the envelope before they seal it and stamp it and put it in the mailbox. Explain how the things your kids might take for granted—like heat and electricity and, of course, cable—cost money each month.

On Vacation

Even the most budget-averse family generally goes on vacation with only a certain amount of money they can spend. Involve your children in the decisions even before you’re on the boardwalk debating between the hot dog vendor or the pizza parlor.

Saving for a vacation is a fun way to teach children about the power of savings goals. If children understand that giving up something now leads to something wonderful later, they will learn the valuable tool of delayed gratification.

With only a certain amount to spend, including children on the planning process of your vacation will help them to learn how to budget and how to rank the importance of different options. Once you are enjoying yourselves on vacation, giving each child a certain amount to spend while away is an allowance lesson compressed into a week.

Help Your Child Make Money Decisions

Your child needs to make decisions with their allowance. One way is to help them comparison shop. You can look online for things your child wants, compare prices, and help your child look for the best bargains. You should also help your children understand the importance of setting aside money for the future, as well as making smart spending choices now.

Talk About Money Mistakes

While it’s hard to talk about money mistakes with our children, it can be instructive. It’s a good idea to talk to your children about our past money mistakes. Additionally, you can make it a point to let your children make mistakes and talk about them afterward. If your child is determined on a course of action, let him go through with it, but when he has remorse later, discuss it with him, and talk about alternatives that would have been better.

Encourage Investing

As your child gets older, make sure to talk about investing, and help him or her make good decisions. Most children are focused on today’s wants and needs. So it’s important to help them understand that value of long-term planning.

Should Children Be Given an Allowance?

No one will dispute that giving children an allowance gives them an opportunity to learn about money, saving, spending and delayed gratification. However, there seems to be some disagreement on whether that allowance should be tied to chores—and therefore earned—or if it is simply given each week. Here are the pros and cons to each side of the allowance debate.

Why Kids Should Earn Their Allowance:

If the point of allowances is to teach children about money, then the most obvious reason to make allowances chore-dependent is so that your kids learn that money isn’t free. It’s very easy to imagine that children who do not have to work for their allowances will grow up feeling entitled. In addition, by tying money to chores around the house, children will learn that they can earn more money for more work—a great lesson.

A further positive aspect of the allowance for chores rule is that it can also help children to learn how to become more competent in a job—and to learn that they can ask for raises if they are doing a better job than they used to. Learning these difficult lessons at home will make your child more confident in his first job, and throughout his career.

Why Kids Should Be Given Their Allowance: 

On the other hand, there are several issues with tying money to household chores. The first is the inflation of rewards for things that your children should already be doing. Being part of a family means doing chores for the good of the family, not because there is a financial reward.

In addition, there are many children who are simply unmotivated by those sorts of rewards. For these kids, no amount of money is worth the ability to ignore tasks. So tying money to chores also ties your hands when it comes to disciplining children for not pitching in.

Finally, appointing yourself as your children’s boss can be tough for parents who aren’t naturally organized. If you pay Junior and Sis for different tasks, will you remember who did what and when? Many parents end up instituting a chart system to keep track of the chore schedule and payment—but if this is not your cup of tea, you may end up teaching your kids that lying about work is a good way to earn money.

Money Lessons Children Need to Learn for Themselves

As you consider what to teach your child, here are five important money lessons your kids should learn:

1. You Don’t Always Get What You Want

Giving your child everything he or she wants may seem like the loving thing to do, but it’s not realistic. We don’t always get what we want. As adults, we know that sometimes it’s impossible to get what we want immediately. Sometimes we have to wait for what we want, and sometimes we just don’t get what we want, period.

So why do we let our children have whatever they want? Say no to your kids sometimes. Let them know that sometimes they just aren’t going to get that new whatever-it-is. This can be a good way to help them be content with what they already have.

2. Save Up for What You Want

Even if you can’t have something you want now, it’s often possible to get it later — if you save up. One thing you can do is teach your child the value of saving money. Encourage your child to save up for what he or she wants, and make it a pleasant experience. This can be a great way to help your child develop a habit of saving money throughout his or her life. Being able to save up, and pay with money already in hand, can be a source of pride, and you need to encourage that.

3. Credit Cards are Loans

Too often, we think of credit cards as representing “our” money. It’s easy for kids to think this way, too. However, a credit limit of $3,000 doesn’t mean that you “have” $3,000. It means that you can borrow up to $3,000. This is a lesson vital to the financial well being of your children. Credit cards are loans. If you carry a balance, you are paying interest. Make sure that your kids understand how credit cards work, and that they realize that the money isn’t “theirs.”

4. Hard Work and/or Innovation Can Mean More Money

Don’t forget to teach your children the value of hard work and/or innovation. Whether your child is working harder or smarter (or both), he or she needs to understand the value of earning money. It’s important that they are given chances to earn money while young and learn to like the feeling of working for what they receive.

5. You Don’t Have to Get Paid for Everything

Finally, I think it’s important that children learn that money isn’t the be all and end all — and that it isn’t the only measure of what something or someone is “worth.”

There are some things we do in life because they are the right things to do, and not because we’re being paid. Service and charity should be encouraged.

One of the reasons that we don’t pay our son for doing basic chores like keeping his room clean, setting the table, gathering the trash, and dusting is that we want him to learn that sometimes we do things as part of a family. We don’t need to be paid for everything we do, and for every service we render. This is a great money lesson as well.

How To Avoid Spoiling Your Kids

No one plans to raise a child like Veruca Salt. The spoiled brat in the story Charlie and Chocolate Factory was given her every heart’s desire by her loving and over-indulgent parents—and became a gimme-gimme monster who ends up being pushed down a trash chute when she won’t take no for an answer.

Obviously, this fictional child is far worse than any real case of entitlement, but Roald Dahl had some pretty sharp observations about what makes a kid spoiled: poor decisions from her parents.

avoid spoiling your kidsThe thing is, Veruca’s parents truly loved her. When she went tumbling down the trash chute, Mr. Salt went diving right after her. Loving your kids is not the issue when it comes to spoiling them—it’s about the decisions and habits you make every day.

Here are three things you can do every day to make sure your child does not end up like Veruca:

1. Let your child feel disappointment

Life doesn’t always go your (or your child’s) way, and that’s as it should be. Parents often want to shield their children from harm, but learning that disappointment, pain, and heartbreak are all temporary helps to build resilient kids (and adults). Your little one doesn’t really understand yet that she’ll survive if she never gets that American Girl doll she wants. But giving everything to her will make her fear that she can’t handle disappointment because she’s never felt it.

One simple way to put this in practice is to let your household run out of favorite groceries once or twice a month. If your milk-loving son realizes that the moo juice doesn’t magically appear in the fridge at his whim, he’ll have a better understanding that he’s not entitled to everything he wants.

2. Focus on the future, rather than the right now

One of the reasons why kids become spoiled is because it is so much easier to hand over whatever they’re screaming for rather than deal with the tantrum. While it may make this particular trip to the grocery easier, it won’t make raising your child easier overall. You need to recognize that your limits now are an investment in the future.

It’s the same way that you encourage your child to save some of their allowance or gift money for the future. If they immediately spend every cent they get, they will never learn how to resist instant gratification.

3. Make children choose

Kids as young as two years old can handle making choices between two options. Older kids can handle even more choices. Asking your child to decide whether he wants an English muffin or a bagel for breakfast gets him used to having a sense of control over his environment and life. This also helps him to develop self-regulation: when a child feels he has some choice, he won’t feel the need to break rules.

In addition, having kids live with their choices helps them to understand the fact that resources are limited and that their choices have consequences. For instance, if they decide they don’t like the cereal they picked out at the grocery store, you can let them know that they still have to finish the box before buying more.

4. Help Children Understand Reality When it Comes to Money

A recent survey by Charles Schwab found teenage boys expected to earn an average of $174,000 and teenage girls expected to earn $114,200. These are very high salaries, and are much higher than most people will ever earn in a year!

This is even more unrealistic when you consider the median earnings for American adults. From the article:

  • Median earnings of men who worked full time, year round in 2005, the latest year for which Census Bureau statistics are available, was $41,386.
  • Women working full time made a median of $31,858.
  • Fewer than 5% of the U.S. population makes more than $100,000, according to the bureau. Only one household out of six report a six-figure income, according to the Federal Reserve’s 2004 Survey of Consumer Finances.

The top 3 career choices among the polled teens were in medical, technology, and teaching fields. It is reasonable for some medical and technological professionals to earn six figures, but it is rare for teachers to earn six figures unless they become a tenured professor or go into administration.

5. Limits are essential

When it comes to entitlement, the problem is not really about money—it’s about a lack of limits. Setting reasonable limits on children from the beginning and making it clear that wanting something is not reason enough to get it will go a long way to help avoid spoiling your kids and keeping them grounded.

After all, you’d hate for them to turn out like Veruca.

Help Your Children Set up a Savings Account

Giving your child a real-world experience with money can help enable them to make smart financial decisions in the future. For starters, open a savings account online for your child. Compared to brick-and-mortar banks, online savings accounts have:

  • Higher interest rates
  • No minimums to open or maintain an account
  • No fees, penalties, or service charges
  • Access to the account 24/7
  • FDIC Insured up to the federal limit (currently $250,000), similar to brick-and-mortar banks

However, if you have a preference towards an in-person experience, local credit unions offer similar benefits. They may have higher interest rates, low minimums, and no fees compared to most brick-and-mortar banks. In addition, credit unions are NCUA insured (similar to FDIC, but specifically for credit unions) up to the same federal limit as banks. Still, there are several differences to bear in mind. Access to the account may be limited either by time or location. Use the NCUA search tool to find a local credit union for more specific information.

Through their online savings account, your child can see how their money grows based on their actions. Money deposited to the account can stem from a variety of sources including:

  • Money from family members for birthdays and holidays
  • Allowance for completing weekly chores
  • Entrepreneurship opportunities, such as opening a lemonade stand or selling their old toys and clothes at a rummage sale

A key ingredient in teaching your kids the value of money is to allow them the freedom to withdraw or deposit their funds at any time (most online savings accounts allow a maximum of 6 withdrawals without a fee per month). Teach them that this is their money to maintain. Once the money is taken out, it’s gone. In addition, they can never take out more money than they have in the account. If your kid wants to purchase items that are not within your budget, grant them the permission to purchase the item…using money from their account. If they don’t have enough, it’s their responsibility to come up with the funds to pay for it.

Finally, go over each month’s statement with them. Each month, point out the amount that they started with and the interest they had accrued. Demonstrate the relationship between the amount of money in the account and the amount of interest they receive. The more money in the account, the more interest they’ll accrue. In essence, you’re teaching them the power of compound interest, a lesson they will definitely appreciate later on in life.

The purpose of the online savings account is to teach your child the value of money and not necessarily to help your child save money for their future (though this is a potential by-product). Saving money is hard work and takes time. Having to save money for a long time in order to have the funds to buy what is desired requires your child to evaluate purchases more closely. It also teaches them delayed gratification. An Xbox 360 is much more meaningful to a child if it required saving money for a year prior to purchase.

How to Get Started

Here are some more money management tips for children:

  • Set an allowance.
  • Have them use their own money for purchases.
  • Teach them about saving and giving.
  • Open a savings account in their name.
  • Start an investment account in their name and teach them to track investments.
  • Offer to match their savings contributions.

Tip: Make learning fun. You can turn learning about money into games or use a board game such as Monopoly or Life. You can also use online games or tools.

It’s Never Too Early to Start

As you can see, I was joking about teaching my daughter about money – she is way too young. But I am already setting the foundation and starting her on a strong financial path.

Shortly after she was born my wife and I opened a savings account and college savings plan for her. The current goal is to make automatic contributions so that over time, she will have a substantial amount of money saved for her college tuition, and hopefully, have a decent amount of money in savings.

A couple notes about opening joint savings accounts: You can easily set up multiple savings accounts with most online banks, and some of them, including Capital One 360 and Ally Bank feature the ability to create sub-accounts, which is an easy way to create accounts within an account for targeted savings.

Related Post: 

How We Manage Our Money on a Daily Basis

Do you have tips for when and how to teach your children about money?

Editor’s Note: Emily Guy Birken and Miranda Marquit contributed to this article.

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About Ryan Guina

Ryan Guina is the founder and editor of Cash Money Life. He is a writer, small business owner, and entrepreneur. He served over 6 years on active duty in the USAF and is a current member of the IL Air National Guard.

Ryan started Cash Money Life in 2007 after separating from active duty military service and has been writing about financial, small business, and military benefits topics since then. He also writes about military money topics and military and veterans benefits at The Military Wallet.

Ryan uses Personal Capital to track and manage his finances. Personal Capital is a free software program that allows him to track his net worth, balance his investment portfolio, track his income and expenses, and much more. You can open a free account here.

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  1. Jeremy @ Modest Money says

    It definitely is important to teach your kids basic money lessons. Too many people grow up without a realistic view of money. I would also try to teach them that it’s their own financial goals that matter. They don’t need to constantly compete with people around them to get the same possessions and luxuries. Instead they should be happy with what they have and be responsible with their money.

    • Ryan Guina says

      That’s a great way to look at it, Jeremy. Treating money and/or possessions as a competition is a quick way to financial ruin for many people.

  2. Krantcents says

    All very good points! As a teacher, I think children should understand they are making an investment in their education and the payoff will be when they get older. Getting good grades and learning will help them later in life.

  3. Kris says

    The most important money lesson I want my kids to learn is that you are responsible for creating your own income – not your boss, not your college degree, not your hard work, not just because you are a good person. But the actual action of making money. If you know how to make money, you will always have a way in life…

  4. Jason says

    Use cash in front of your kids, not just your credit cards. Using cash gives them a better understanding of costs, and the value of money, whereas credit cards are more abstract of a concept. Seeing someone make a big purchase with cash has a much greater impact than paying with a credit card, even if the credit is paid off monthly.

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