It’s natural for parents to want the best for their children.
And as parents, it’s your job to lay a solid foundation that they can build upon to do well in life. For many, this means teaching our children good values and belief systems. However, there is another key lesson that will impact whether they will do well. That lesson is about money.
“Without a working knowledge of money, it is extraordinarily difficult to do well in life,” says Sam X Renick, co-creator of Sammy Rabbit, a children’s character and financial literacy initiative. “Money is central to transacting life, day-in and day-out. Where we live, what we eat, the clothes we wear, the car we drive, health care, education, child-rearing, gift giving, vacations, entertainment, heat, air-conditioning, insurance—you name it, money is involved.”
Unfortunately, many parents are not teaching their kids to become financially literate.
Results from T. Rowe Price’s 11th Annual Parents, Kids & Money Survey showed that nearly one-half of parents said they regularly miss opportunities to talk to their kids about money and finances. And one quarter said they are very reluctant or extremely reluctant to discuss financial topics with their children.
On the flip side, on- half of the children surveyed said they wish their parents had taught them more about money. According to a 2018 National Financial Capability Study, It doesn’t take much to set your children on the right path toward financial literacy. The study showed that 49% of respondents who received more than 10 hours of financial education report spending less than they earn, compared to 36% among those who received less than 10 hours.
Children are learning every second of every day. So, even if you’re not teaching your kids, they will learn lessons about money one way or another, which may end up causing more harm than good in the long run.
If you’re still wondering how you can guide your children’s feelings, thinking, and values about money, here’s how to teach your kids about finances at every age:
At this young age, learning is imitation-based, but they are still learning and picking up your habits. That is why it is so important to set a good example for them to follow later. The habits they’ll pick up include developing a budget at the grocery store, paying bills on time, and resisting impulse buys. You can also discuss your decision-making with your toddler, teaching them how to make better decisions on what to (or not to) buy.
Preschoolers and Kindergartners
While kids at this age may not understand the value of money, they should understand the need to pay for merchandise. Kids learn from shared experiences, so include them in the grocery trip to help them understand this process. To make it more tangible, leave the credit cards at home and use cold hard cash.
According to a University of Cambridge report, children develop basic financial behaviors like counting and exchange by the time they are 7 years old:
- Counting – You can start with simply counting objects, then proceed to count coins and dollars. Show kids the different kinds of coins and bills, allowing them to recognize the differences, group them, and then count that specific set.
- Exchange – Practice this concept by giving your child one dollar to spend in the store. Because money can only be spent once, this teaches them to focus on choosing an item they really want. Then the child must hand over that dollar to purchase the item, allowing them to experience the exchange of goods.
First to Fifth Graders
At this stage, your child should have a basic understanding of the purchasing power of money. Now it’s time to explain how to earn money, save it, and make smart choices with their money.
- Earning money
Unfortunately, money does not grow on trees, it is earned. The easiest way for kids at this age to earn money is with chores. Instead of giving your child an allowance, which can create a sense of entitlement, pay them to do chores and reward their hard work and commitment. This teaches the ultimate lesson in finance: it takes work to earn money.
- Saving money
Instead of using an ordinary piggy bank, try using a mason jar. A clear jar allows your child to see their money grow over time, helping reinforce the benefits of saving. But don’t just let your children watch their money grow, explain why it’s important to save – short-term needs, long-term goals, establishing an emergency fund – and give them examples to help them appreciate real-world finances.
- Opportunity cost
A fifth-grader should be able to understand the concept of opportunity cost, even if you don’t use that term. Opportunity cost is the loss of potential gain from other alternatives when one alternative is chosen. This is an important concept for helping your child understand impulse buying versus long-term goals. Explain the difference between needs and wants, and how to prioritize them.
Sixth to Eighth Graders
If you’ve followed the above recommendations, you’ve already established a lot of great money principles for your middle-schooler. Now it’s time to expand on those basic concepts by teaching your kids about income, budgeting, and contentment.
“What do you want to be when you grow up?” It’s important to ask this question at an older age so you can have a real conversation with your child about the need to find a career that will support them for a lifetime. This is also a good opportunity to explain taxes, Social Security, insurance premiums, and other deductions from your paycheck.
Don’t wait until your child needs to make a personal budget of their own. Now is the perfect time to teach them the concept of budgeting and why it’s so important. Include them in your budgeting, asking for input on financial decisions like meal planning for the grocery budget – this is great practice!
- Contentment and giving
For pre-teens and teenagers, the pressure to fit in and compare themselves to others is immense. It’s crucial to teach your children to be satisfied with what they have rather than trying to keep up with their peers. Moreover, they need to learn to appreciate what they do have. It’s also important for kids (for everyone, really) to understand the benefits of giving back and donating to charity.
At this age, your child is looking for new levels of independence – and it’s important to give it to them. It’s not long before they are off on their own, and they’ll need the practice while still in the safety net of their home environment. At this stage, give your teenager firsthand experience with a checking account and budgeting for college.
- Personal accounts
Every teenager should know how to balance a checking account. While personal checking and savings accounts do not establish credit, they will allow your teen to practice handling their own finances and see firsthand the impact of compound interest.
- Credit cards
Credit cards can have their benefits, but teenagers must learn the dangers of credit cards and how to use them wisely. It’s important to teach them to pay off the balance and avoid buying things they can’t pay off each month. A good way to explain interest charges is to look at the interest a bank pays you on a savings account versus what a credit card charges you to use their money.
- Paying for college
As you and your teenager prepare for college, compare the costs together, and discuss how you’re going to pay for college. Not everyone needs to go to college, and tuition costs vary greatly among schools. This is a huge decision and will influence the rest of their lives.
- Saving in a 529 Plan
If possible, have them contribute to their own 529 account. Funds in a 529 account can be used tax-free for qualified higher education expenses at four-year colleges or universities, two-year community colleges, trade or vocational schools, apprenticeships, or certificate programs. With this kind of savings account, your children can go to a school where their interests, talents, and skills lay.
Learning how to handle money is a lifelong process. However, the earlier your child embraces good financial habits, the more likely they are to find financial success. And when it comes to saving for college, the key is to save early and often. Time is your greatest asset so start saving for college as soon as possible. The sooner you start saving, the more time there'll be for your savings to grow and the earnings to compound.
CONTACT US today to speak to an experienced advisor about getting your child started on the right financial footing with personal checking, savings, or 529 accounts.