A major role of parenting should be teaching kids about money. For many reasons, parents drop the ball in this area and raise children who carry an improper understanding of money into college and adulthood. This leads to challenges as the grown children seek employment, earn an income and determine how to manage their financial lives.
What children should learn about money varies depending on their age. A five year old needs to hear different messages from the parents than does a teenager. However, there are three fundamental money lessons that every child needs to learn no matter what the age:
1) to save money for future needs,
2) to spend money wisely and
3) to give generously.
These three principles serve as the foundation upon which other money lessons build.
There are differing opinions about when to start teaching kids about money. Many say kids as young as three can start to learn the basics. In our home, we waited to get serious with money lessons until the age of five. We found that our children understood the concept of giving at an early age but struggled with saving and spending. By the age of five they were better able to grasp those last two concepts and understand their importance.
Teaching Kids About Money at Various Ages
Aside from saving, spending and giving, what should children learn about money and at what ages? Here are the four big lessons we are hoping to impart as we are teaching our kids about money:
Money Lesson #1: Enjoy It (Ages 5-7)
Enjoy it? Really? That’s the first lesson we are teaching kids about money?
Let me ask you a question. Do you enjoy what money brings…what it allows you to purchase? Of course you do. So do I. Where do you think we first learned that? Very early on in life as we watched our parents enjoy their stuff.
Now before you get too carried away here, realize I’m not talking about churning out little hedonistic monsters that seek to gratify every pleasure. We are going to make sure that doesn’t happen in the coming lessons. But there is a fundamental principle here that is most easily learned when the kids are young: money comes to me as a reward for my hard work and it’s not evil to spend it on things that I enjoy.
So how can parents help kids enjoy money? For starters, pay them a commission (allowance) for the work they do around the house. This builds the “work = money” link in their heads. Get really excited whenever you pay them, whether that’s once a week or the moment the task is completed. Talk about the things they want to purchase by looking in catalogs, online or on the shelves while shopping.
Most importantly, don’t crush every attempt they make to spend. Of course parents should set limits. If we didn’t candy would be the only thing they purchased. Give them some flexibility though to buy that $2 bouncy ball, even though you know it’s a cheap rip-off and they will probably lose it inside a day.
This is really tough for money-wise parents but by doing so, you are actually winning on two fronts. You’ve become the awesome parent who lets their kids buy fun stuff and you are letting them experience the “cheap product” and “take care of my stuff” lessons for themselves. That last lesson will prove very valuable later on and they won’t learn it unless you let them experience some purchasing failures.
Money Lesson #2: Delayed Gratification (Ages 8-10)
Delayed gratification is a foreign concept for a 5-7 year old. My kids never got the whole “waiting game” at that age. They wanted to buy stuff, so that’s why we focused on enjoyment for lesson #1.
Plus, they really didn’t understand how much $20 was. Ask a kindergartener what they could buy with $20 and they could say anything from a gumball to a PS3 to a car.
By age 8 however, I saw a pattern begin to develop in that my kids didn’t want to buy everything in sight. I think it’s because I let them purchase a bunch of cheaply made toys early on and they learned plastic breaks easily. Every time it did, I would say something like “That’s the type of toy $3 buys. The more expensive the toy the better it’s made.” I think that message sunk in and by this age they were better able to discern the value of an item.
This allowed me to easily teach the concept of delayed gratification – to postpone or defer the pleasure received from a purchase until some time in the future. Instead of getting everything right now because I have the money to buy that $2 item, I’m going to have to wait. That Nerf pump action assault rifle looks really cool but I’ll need more than $2 to get it.
So I did start to coach them a bit more at ages 8-10 on waiting to buy more expensive things. I would use phrases like, “Why don’t you wait to get something you will enjoy more?” and “I don’t think you should get that item because (then give a reason)…” and “Remember what happened the last time you bought one of those?” These were all designed to teach that pleasure from spending doesn’t have to be immediate. In actuality, we derive more pleasure when we wait.
Money Lesson #3: Setting Goals (Ages 11-13)
This is where it really starts to get rewarding, when you can teach kids about setting big goals for their money. You’ve subtly been doing this on a small level already, as you’ve taught delayed gratification to the 8-10 year old. Now it simply becomes a bigger deal and more formal.
By this time, if your child has been earning money since age 5, they might have quite a bit accumulated in their savings account. They may have never dipped into that to purchase anything, having only used the spending portion of their earnings to buy stuff. “So what am I saving money for?” they may ask. That’s a great time to have a formal goals discussion.
What goals might preteens be thinking about with their money? Probably saving for bigger ticket items like clothes, electronics, or trips/activities with friends. Some might already be thinking about cars or paying for college. Help them figure this out and when they settle on a goal that you approve, get behind it 100%.
Push them to achieve the goal. Keep them on the right track, especially when they are tempted to blow their money on non-goal related items. Help them stay motivated by tracking their progress, perhaps in a computer program. Our oldest daughter has made an Excel pie chart to track where her dollars are going and loves updating it.
If you need help on setting appropriate goals, I devoted a whole post to it here.
Money Lesson #4: Responsibility (Ages 14-18)
We haven’t personally experienced this stage in our house yet, as our oldest will turn 14 next March.
However, having been around teens for my entire professional career as an educator, I know they need to be taught responsibility more than anything else. It’s a wild time in child’s life as hormones are raging, peers are pressuring, and individualism is bursting forth. If parents stop the money training and oversight now they will blow everything they’ve taught thus far.
How are we going to teach responsibility to our teen? For starters, goal setting will continue and be ramped up to a whole new level. The focus here will be on college and what financial role, if any, the child will have for that. Of course, focusing their attention on achieving solid academic grades with the hopes those turn into scholarship money will be a key priority.
Working outside the home at a summer job will ramp up the levels of responsibility. Teens learn what it’s like to work for a real employer and are again reinforced with the “work = money” concept.
If you haven’t already, open a savings and checking account for your child at a local bank. Teach them how to deposit funds, write checks and reconcile a checkbook.
Teens should also be introduced to the process of budgeting. Even though they will still work around the house, we plan to move away from commissions for our teenagers and simply give them a set amount of money based on what we would normally spend for them during the month. With our guidance, they will be responsible for budgeting that money for their expenditures. Once it’s gone, it’s gone.
You certainly want to have the debt/credit card discussion before they run off to college. Kids need to know the dangers of debt and how to use a credit card responsibly. If you plan on getting your child a credit card for college, you may want to do it before that in their later teen years so you can monitor their self-control (or lack thereof) while still under your care.
Lastly, investing is not beyond the scope of a teenagers understanding. We plan to show our daughter how to do that and open up funds in her name when she’s ready.
Don’t Blow Teaching Kids About Money
You may feel inadequate to teach your children about money based on your past failures. Perhaps it’s a perceived lack of knowledge that’s holding you back. Maybe you are too busy.
My advice for parents who may feel this way is short and sweet…Get over it!
Forget about the problems you’ve had in the past and move forward. Start reading and get the basic knowledge you need. Make time to establish this as a priority for your children.
There really can be no excuses. It is the parent’s job to teach kids about money. If you choose to neglect that responsibility, your kids are being set up for big failures and tough financial times ahead.
Questions: What other issues should parents address when they are teaching kids about money? What was the biggest lesson your parents taught you? When did you start teaching your kids to save, spend and give? What other lessons do kids need to learn? Any parents with teens want to chime in and share your experiences?
Prior Post: Richness Breeds Arrogance But There Is A Cure