Several years ago, I took my son Gavin to the CoinStar machine to turn the random coins he’d been collecting into cash. Added to the previous two years of birthday money, his total was right around $150. As he stared at that money (and lamented the fact that now all he had was paper instead of a huge jar of coins), I realized that it was time to start teaching Gavin about money.
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Money basics for young kids
Really, it is a good idea to start with the basics. At that time, Gavin didn’t grasp the fact that four quarters equals one dollar. But he did know we needed money to buy things. And we tried to expand his horizons by teaching him about other uses for money. In order to do this, we put envelopes in his big (recently vacated) money jar:
- Donating. Many personal finance gurus stress how important it is to give. And research is backing up this priority as one way to build happiness. This is something we wanted to teach our children: that their success in life is about more than just themselves. We talk about how lucky we are to have things we need, and we point out when others aren’t so privileged. Gavin already knows we can help others by donating to thrift stores, which we do regularly. And when we started his three envelope system, he started giving donations to our church for their efforts to help the needy.
- Saving. We started explaining to our children at a young age the importance of saving for things they wanted. We started explaining this using non-monetary lessons. For instance, we used TV coupons for a while. When Gavin behaved, he earned a coupon for watching TV. We assigned each movie in his collection a number, related to length. He needed that many coupons to watch the show. So when he wanted to watch The Incredibles, a four-coupon movie, he decided to hold onto the two coupons he already had to earn enough for that movie. Once this habit was established, we explained that saving money worked the same way. And we gave him an envelope for saving in his money jar. Eventually, we’ll transfer that money to a savings account with a good interest rate.
- Long term. We also started teaching our kids early on that sometimes things happen unexpectedly. This is a tougher concept to teach at a young age. But we helped our kids to understand that they needed a store of money for the long term. For instance, we asked our son what he wanted to do when he grew up. He wanted to “be in charge of construction trucks.” So we explained that he’d need money to go to college to learn about this, and that he should start saving early. Gavin had a long-term savings envelope in his jar, too. Once he was older, we used this money to teach him about investing and basic concepts like interest.
- Spending. We didn’t give our kids a specific category for spending. This money could just come out of what was left over after they funded the other three categories.
You don’t have to use the exact steps we did to teach your young kids about money. But here are some general tips to follow:
- Start early. As soon as kids are old enough to count, they’re old enough to start learning about money basics. For instance, they can count out the four quarters it takes to buy a small piece of candy at the grocery checkout line.
- Talk often. Kids will ask great questions about money, spending, and priorities if you let them. Be willing to have the conversation when it comes up, and be honest in your answers. If you choose not to spend on something, say that. Don’t tell kids you can’t afford something unless that’s actually true.
- Make it concrete. Money lessons for little kids need to be concrete. For instance, interest is a bit of a fuzzy concept, even for some adults. With kids, you could start teaching about interest by, for instance, giving them a nickel each week for each dollar that they left in their saving envelope over the past week.
- Make it short-term. It’s fine to start talking to young kids about saving for long-term goals. We did. But they should also be able to get some quick wins with their money. For instance, help them set a goal to save for a game or toy that they can buy within a reasonable amount of time–up to a couple of months. Otherwise, they’re likely to lose track of why they’re saving in the first place.
Helping older kids understand money
This can be a little easier than helping young kids, since older kids can grasp larger concepts. If you have laid the foundation in their younger years, older kids should continue building good habits.
This is a time when you teach them about concepts like credit, compound interest, and investing. You can help your kids navigate money by helping them open bank accounts and helping them balance their statements.
Open different accounts for different purposes: long-term savings, high-yield checking accounts, and investment accounts. If your teenager has a job, he or she can even open an IRA and start saving for retirement.
Some parents like to help their older children start establishing credit. In order to do this, you can co-sign on a car loan or help your child get a credit card. But there are some things to remember in such cases:
- Have kids make their own payments. You may help your child get a loan or credit card, but before you do, make sure your child knows he or she will be responsible for making the payment. Talk to them about making choices they can afford, and impress upon them the fact that they must make regular payments. My parents made it clear to me that if they ended up making the car payments, I would no longer have the car to drive.
- Be clear about interest. This is very important in terms of credit cards. Show them interest charges on credit card bills. I have saved some of my old credit card bills — from the days when I was somewhat careless of carrying balances — to show my son when he’s older. Point out that interest doesn’t provide any return value. All it does is make someone else rich. Point out that credit cards represent someone else’s money, and that this is why they should pay off their balances every month. Even if you don’t get your child a credit card, this is still an important lesson to teach. Who knows what he or she will do later on.
- Do some math. Older kids are big enough to start learning about the actual math of things like compound interest. Look up a good compound interest calculator, and run some scenarios. Look at how much they can save in 20 years saving just $50 a month. Then look at how much they’ll pay if they make the minimum payments on a car loan or student loan. Seeing the numbers laid out can be helpful for most kids.
- Give them responsibility. If kids are able to use their money for only what they want, they won’t likely have to make hard choices. You’re providing for all their needs. So they just have to decide which toy, video game, or designer whatever they want next. But you can help them become more financially responsible if you put some of the onus on them. For instance, give them part of their clothes spending budget for the year, but make them responsible for their own back to school shopping. If they make some mistakes, let them. They’ll figure it out. And it’s better that they do this now than when they’re in their twenties with a lot more than designer jeans at stake.
- Talk about college. Be up front with your older kids about what you can and can’t do in regards to college. For instance, you might offer to pay up to the amount that it would cost them to go to an in-state, public school. But they’ll be responsible for the rest. Talk through the pros and cons of using student loans, how to choose a major that will lead to a good job, and more. Have these conversations early and often so your kids are prepared by junior and senior year of high school.
An allowance can be a good idea. This lets young children learn how to manage money early. As children get older and get their own jobs, an allowance may not be as necessary.
However, you can make kids responsible for some of the money you would have spent on them anyway. Obviously, you’re responsible for clothing your children. But they can make the choices here.
For instance, my parents gave myself and my siblings a school clothing allowance of $100. We could spend more if we wanted, but we had to fund it. Two of my brothers and I avoided designer brands and usually just spent what our parents gave us. My sister and other brother, though, wanted the hottest styles. They burned through their allowance quickly, and then had to use their own money. After a couple of years of that, my brother started checking his priorities!
Most parenting experts agree that allowance shouldn’t be tied to basic chores. I tend to agree. My children has chores they were expected to do as a member of the family. They got an allowance, but that was separate from the chores.
For one thing, I didn’t want my kids to learn that money should be their main or only motivator. Also, i wanted them to learn to manage their money, so made that a separate goal entirely from learning to work hard around the house.
One option, though, is to allow kids to earn a commission for above-and-beyond type chores. These are chores you wouldn’t expect them to do in the normal course of things. With this option, you can give even younger kids the power to earn additional money to reach their goals faster, should they choose to do so.
However you do it, teaching your kids about money is an essential part of parent. It’s just as important as teaching them to do their own laundry and cook their own meals. Maybe even more important. If they manage their money really well, they can outsource those other tasks!
How have you taught your kids about money, or how do you plan to teach them in the future?