When it comes to teaching your children about money, think of it as teaching them survival skills. If you do not teach them about money–budgeting, saving, shopping and credit–it will be left to trial and error, which could prove costly and time consuming.
Since only about 10% of young people learn personal money management in school, take this opportunity to be the primary educator for your children’s financial foundation.
What Should You Teach Kids About Money?
Teach by example with age appropriate themes that cover four practical topics: budgeting, saving, shopping, and credit.
Unfortunately, basic budgeting is not taught in schools and children need to have a plan for their money. When your child has learned to multiply it’s time to explain the basics of interest. Keep a jar in the kitchen and as the jar fills with loose change, children learn the first steps towards savings.
Shopping strategies such as comparison shopping for prices and quality and a discussion of wants versus needs is important. Our wants are unlimited, but our money is not.
Explain that credit is not free money; it may get us things faster but we may end up paying more over a long period of time. Our handling of credit obligations, good or bad, is reflected in a credit report that many businesses, lenders, and employers view. Misuse of credit may affect our future ability to have a place to live, work or borrow additional money.
In addition, children need to develop strong values and morals about what money is and isn’t. Money is not taboo, evil or dirty, nor is it a measure of personal worth. Children should never get the idea that the more money you have the more worthy a person you are. Money is merely a ‘medium of exchange’.
Saving and setting goals for large purchases builds self-discipline as opposed to immediate gratification. Kids might not understand what an annual percentage rate is, but somewhere along the road they need to learn that it is a good idea to repay a loan. Help them to understand the importance of repaying a debt; when you borrow money you promise to repay it. You want to make good on your promise and build good credit.
How Do You Teach Your Children About Money?
Teach by example. You are the first – and best – teacher for money management. If you don’t instill positive money management values in your children, others will (peers and advertisers) and it will be left to trial and error. Children follow our guidance until about age 10, and then they start looking to their peers.
Without even thinking about it, everyday you are teaching money skills by example through your actions and communications. What you say is not merely as important as what you do. You might want to examine your own money habits and attitudes with the questions below to uncover the message you are sending to your children about money:
- Is your approach to financial matters calm and rational?
- Do you argue about money? Neglect savings? Live from paycheck to paycheck?
- Do you feel guilty about money? Anxious? Afraid?
- Do you need money to feel ‘good enough’?
- Is money a way to express love, anger, guilt, power?
- Do you overspend? Do you often buy on impulse?
- Is shopping a pastime or a cure for depression?
- Is money the goal or a tool to meet goals?
- Do you pay bills on time?
- Do you believe in sharing with the less fortunate?
*Source: Money$kills: 101 Activities to Teach Your Child about Money.
Talk to your children about the future, whether it’s planning and saving for college or a new home. It helps children to know that you are holding off purchasing a new car because you need a new furnace for winter, or that you are saving for the family vacation to Disney instead of using your credit card to finance it now. Setting goals, along with planning and saving, helps you make your vision a reality.
Money Education For Three To Five Year Olds
Two books can be helpful at this age: ‘Pat the Cat’ by Edith Kunhardt and ‘The Berenstain Bears Get the Gimmies’ by Stan and Jan Berenstain.
‘Pat the Cat’ shows Mommy making a shopping list and sticking to it, and Daddy going to the bank machine, taking money out and paying for the groceries. ‘The Berenstain Bears Get the Gimmies’ book shows Papa bear explaining that you can’t have everything you want all the time.
Explain how things are bought and sold. Money is a means of exchange for things. We trade money for things, and we can only use it once, then it’s gone. Let them shop with a small amount of money.
Discuss that bigger is not necessarily better. This will be a challenge. Use a nickel to show and explain that it is less than a dime even though it is bigger.
Money Education For Six To Seven Year Olds
Television and the magic of persuasion becomes an issue. It is a good time to talk with your children about advertising versus what an item can really do. Also, it is a good time to introduce the allowance and savings strategies.
For savings, give your child three banks (jars) labeled with the following: Spending, Saving, and Sharing. This will start them thinking about planning and spending their money. You can even tape a picture to the jar of something specific they are saving for such as a truck or Barbie doll.
Since most children will get money out of their parents anyhow, now is a good age to introduce an allowance. Start with a $1 or so given every week. Show that a $1 is equal to ten dimes or four quarters. Some parents give money equal to the child’s age and others use half of the child’s age. Be consistent and pay at the same time every week. At this age, the amount should be weekly. Keep the amount reasonable, too. Overdoing it gives the impression that things come easy and under-doing it gives the impression that things come too hard. Clearly explain what they are expected to pay for with their allowance money. What you expect them to pay for out of their allowance will ultimately affect the amount given.
There are two schools of thought on allowances: payment for work performed or payment unconditionally.
The first approach, payment for work, can be a source of conflict and power struggles. The child may say: ‘I am not making my bed anymore because I don’t want an allowance.’ Plus, this method may undercut the moral concept that the family is a unit where each member contributes and works.
The second approach, payment unconditionally, is recommended by most psychologists. The allowance is used a money management tool, no strings attached. All family members are expected to do their share of work around the house – not tied to an allowance. Chores must be done as a part of family responsibilities.
You may also want to consider a combination of an unconditional allowance plus extra earnings for extra chores. This starts to give them the message that when we work, we earn. Activities to encourage at this age include playing grocery store or fast food restaurant where a child can learn to make change.
Money Education For Eight To Ten Year Olds
At this age, give annual raises for allowance and open a savings account. Give opportunities to earn extra money for extra chores. A visit to the workplace can open discussion on where the money comes from and how it is earned.
When they have a basic understanding of math, show your children how to comparison shop with these activities. While grocery shopping, ask your child if it is better to buy 24 Popsicles for $1.99 or the fancy red, white and blue ones that are 12 for $1.50? Also, have them scour the store and let them pick one item they really want. Consider letting them plan a lunch for their friends and help them pre-plan with a budget, shopping list, and trip to the grocery store.
Explain how the family gives up some purchases in order to save for others. For example, you may have to cut back on eating out to save for vacation.
Money Education For Eleven To Fourteen Year Olds
At this age, give larger allowances less often. Double the amount and give it every two weeks instead of every week. This will help them to plan and budget. Increase what they’re responsible for buying, too, and introduce the subject of investing.
Start to set goals. Discuss saving for college or a first car. Consider matching amounts they contribute to savings to give an incentive to save. Explain the different ways to save such as with a savings account or a CD (certificate of deposit). Include in your discussion how to calculate simple interest rates that may vary from bank to bank.
Have your children watch you pay bills. Make a pie chart showing where the household money goes, and include your children in your family budget talks. Tune into peer pressure and the desire for status purchases. At this age, your child is an ideal target for advertisers because they like new things.
Money Education For Fifteen To Eighteen Year Olds
At this age, your teens need to become more sophisticated about handling their own money. This is the struggle for independence. Teach them life skills.
Show them how to use a checking account and debit (ATM) card – making sure they record all transactions and fees. Have them balance their own checkbook and pay their own bounced check fees.
This is also the time to encourage them to get a part-time job. This is probably the best way to bring home the message about earning money and also the benefits of higher education. Minimum wage only stretches so far. You may want them to open their own checking account if they have a job.
Discuss credit. Include topics of credit cards, costs and fees, credit reports, and credit habits. Explain that credit is not free money; it may get us things faster but we may end up paying more over a long period of time.
It is a good idea to let them feel comfortable with using a debit card first. Your teen will need to know the vital difference between what you have (debit card) versus what you borrow (credit card). Consider allowing them to use your credit card it they pay the bill. When your statement comes, take time to explain the statement with close attention being paid to the due date and limit.
Our handling of credit obligations, good or bad, is reflected in a credit report that many businesses, lenders, and employers view. Misuse of credit may affect our future ability to have a place to live, work or borrow additional money.