There’s a specific conversation I frequently have with people around my age. As they get closer to middle adulthood and look back on everything they’ve learned about money, they start to wonder—why didn’t they teach us this stuff in school?
For whatever reason, the American education system is sorely lacking when it comes to personal finance education. You can easily enter adulthood without ever learning how to set up a budget, open a retirement account, or build a respectable credit score. If school is supposed to set you up for success as an adult, that seems like a glaring blind spot.
That’s why it falls to parents to teach their kids about money. Here are some important topics to cover and how to teach them lessons that will actually stick.
- Share Your Mistakes
- Explain the Value of Compound Interest
- Show Them How to Budget
- Let Your Kids Make Mistakes
- Teach Them to Give
The Concept of Money
As a parent, knowing how to explain money to a child might seem like a challenging task. There are so many nuisances that come with managing and making money, so where do you even begin? A good starting block is simply going over the concept of money. In a basic sense, the concept of money can be viewed as the payment for goods and services. You can teach the concept of money in a variety of ways, depending on the age of your child or children. In the next section below, we’ll provide a few tips on how to teach kids about money.
When to Teach Kids About Money
Money is often regarded as taboo, as many parents shy away from telling their children how to manage it properly. However, one is never too young to begin learning about money. Knowing how to explain money to a child can be daunting at first, but there are plenty of ways you can begin educating kids about money as they grow.
Below, you’ll find a few suggestions for different age groups to help you begin teaching kids about money:
Younger than 3
- Coin identification: Allow children to trace coins on a piece of paper, color them in, and repeat the names.
- Play store: Use pretend money and have children buy items of different value found throughout the house.
- Toy calculator and checkbook: While you’re balancing your checkbook and paying bills, give your children a toy calculator and pretend checkbook and play along.
Ages 3 to 5
- Saving, spending, and giving jars: Have three jars dedicated to saving, spending, and giving. The spending jar will be for everyday expenses like candy bars, the saving jar for larger purchases like a toy, and the giving jar for a friend’s birthday present or charity.
- Imaginary restaurant: Turn your kitchen into an imaginary restaurant and have them pay a bill at the end to teach them about the importance of paying for services.
Ages 6 to 10
- Savings account: Bring your kids to the bank and open a savings account for them to show them how banks protect your money and give you interest. They can then deposit any money they make from birthdays, holidays, and allowances.
- Coupons: Now is a good time to explain the importance of saving money, and one of the easiest ways is by browsing for coupons. Once you clip a fair share of coupons, visit the grocery store and show them how they saved money at the checkout.
Ages 11 to 13
- Budgeting: As your children begin to grasp the concept of money better, you can have them create their own budget with a budgeting app or a simple piece of paper and a pencil. This way, they can begin saving for their first car, college, or other expenses early.
- Yard sales: Host a weekend yard sale to teach your kids how to place value on certain objects and make money while doing it.
Ages 14 to 18
- Debit cards: Now that your children better understand the concept of money, give them more responsibility by opening a checking account with a debit card. It also allows you to monitor their spending to ensure they’re making the right financial decisions.
- Taxes:During this age period, your children will be eligible to begin working. Once they start making an income, you can teach them about how to file taxes come tax season.
How to Talk to Your Child About Money
Money management for kids can be stressful, especially if talking about money is new to you. Fortunately, there are plenty of money management lessons for kids that you can teach them that will hopefully benefit them throughout their life. To help you get started, take a look at these five ways you can start teaching kids about money:
1. Share Your Mistakes
I grew up in a household where my parents were honest about money. They didn’t mind talking about how much they earned, how much they spent, or most importantly, how much they owed. I probably learned as much from their failures as I did from their successes.
My parents are immigrants and had never seen a credit card before they moved to America. Entranced by the shiny plastic, they signed up for several, not realizing how easy it would be to rack up a balance. It wasn’t long before they ran up a balance that took them more than a decade to pay off.
After my parents learned their lesson, they always taught me to avoid putting more on a credit card than I could afford to comfortably pay off. Seeing how credit card debt affected them spurred me to pay off my student loans quickly and avoid other forms of debt.
I remember hearing conversations about their credit card balance and how they regretted taking on so much high-interest debt. I wasn’t old enough to grasp the specifics, but one thing was clear—they had made mistakes, and now they were suffering the consequences.
Don’t be scared to share your personal finance mistakes with your kids. If you put off saving for retirement and playing catch up, tell them about your experience and how you’re fixing it. They’ll learn best from your personal example.
2. Explain the Value of Compound Interest
One of the most important savings lessons anyone can learn is how compound interest builds wealth.
Compound interest is the concept of interest building on interest. When you save or invest money, you earn interest on your contributions. That interest will then be added to the principal, where it will earn more interest.
You can do this by opening a high-yield savings account for your child, preferably one that earns at least 1% in interest. Every once in a while, pull up their account statement to show how much interest they’ve earned. When they’re old enough, you can encourage them to use that money to open a retirement account.
3. Show Them How to Budget
Like any life skill, budgeting takes a while to master. The earlier your child starts practicing, the better they’ll be at making hard decisions as an adult.
You can do this during a family vacation or field trip. Give your kids a set amount at the beginning of the trip and tell them what they’ll be responsible for buying, like extra snacks or souvenirs—letting them choose their own purchases will teach them how to allocate resources wisely.
Before the trip, you can explain what prices might be like and how to make decisions. If you’re giving them $30 and each toy costs $15-$20, explain how they can probably only afford one big toy or a couple of small ones, but not everything.
4. Let Your Kids Make Mistakes
Credit expert and father Matt Schulz advises parents to let kids make their own money mistakes, even if they can prevent it.
“I’m a big believer in letting a kid experience buyer’s remorse,” he said. “Let them use their money to buy something they really want but that you know they’re going to forget about two days later. That can help them think twice before they buy the next thing.”
Chuck Jaffe, host of the “Money Life” radio show, witnessed this first-hand when his daughters were six and four years old. They were at an outdoor-themed chain restaurant when the girls spotted a toy in the restaurant gift shop, a puppet named Timber the Talking Tree.
Jaffe explained that they could each afford the toy, but it would empty their bank accounts. The girls each received a weekly allowance and were allowed to spend money however they chose. Jaffe told them they could share the toy and save some money, but they didn’t want to do that. So they each bought the toy.
Three weeks later, they stopped playing with it. What’s worse, it took them almost three months to rebuild their bank accounts to where they would be if the girls had just shared the toy.
Jaffe said this lesson has stuck with his daughters. Now in their twenties, they still decide on big purchases by asking themselves, “Is this going to be like Timber?”
5. Teach Them to Give
With online and mobile advertising, your kids are bombarded with images and links of products they want. Without proper guidance, they can easily end up spending their allowance on material goods as quickly as they receive it.
If your kids get an allowance, encourage them to donate part of it to charities and causes they care about. It could be the shelter where you adopted the family dog or a charity that works in your neighborhood.
Giving away money also reminds kids how lucky they are and how much they have. It’s important to teach your child the value of a credit score, but it’s also good for them to see how giving away $5 makes an impact on the world.
If you and your spouse give to charity, explain why it’s so important to you. Your child might even want to start their own fundraiser.
Children look up to adults as role models. By setting a good example and having a positive attitude about money, you can teach them how to be financially responsible to set them up for a future of success. It’s never too late to begin teaching kids about money. Whether they’re just learning to read or about to head off to college, there are lessons you can teach that they can carry throughout life. It might not be easy at first, but by starting now, they’ll be able to develop a strong relationship with money and learn essential life skills.