Kids & Money: Start Early & Keep the Conversation Going
In a recent video exclusive to our Facebook group, Blueprinting your Financial Future, Bradford shared the three lessons he’s teaching his two daughters about money. (Join our group to watch this content.)
Today we will dive deeper into this issue and drive home one point. Schools don’t really teach money management. They don’t teach your children and grandchildren responsibility with their finances, or the far-reaching consequences of not handling such an important matter well.
If you don’t teach them about money, how do they learn? Unfortunately, they often don’t. They often learn the lessons required for a fiscally secure life the hard way—by making a painful mistake.
When should children learn about money?
The short answer is now. By age 3, basic money concepts are within a child’s grasp. As soon as your child understands money is used to buy things, begin the conversation. A 2013 study by behavior experts at the University of Cambridge concluded that we form money habits in a narrow window, up to age seven.
Warren Buffett believes waiting too long to talk to your kids is the biggest mistake people make. And the evidence backs him up.
By age 7, they already have the money habits that will stick with them for the rest of their lives. Experts found it harder to change these early habits outside of this age-window.
“Sometimes parents wait until their kids are in their teens before they start talking about managing money — when they could be starting when their kids are in preschool.” Warren Buffett, CNBC 2013
But this doesn’t mean you give up if you haven’t gotten the point across by the tender age of seven. Just expect that the older children are, the harder your job might be since your working on mindsets that are already set.
Topics at Every Age
Up to Age 5
Teach the basics of money: earning, saving, spending, and sharing. Kids love coins so this is the perfect time to introduce a piggy bank and watch the money add up. Make this easier by choosing a clear container so they can see it grow with their own eyes.
Don’t stop with just one container. Get two or three! Label them Save and Spend, or add the third, Share. When your child gets money for chores or a holiday, like their birthday, have them divide the money equally among the jars.
An allowance for simple chores, such as making their bed and putting away their toys, can illustrate the concept of earning. If they don’t do their chores, they don’t get paid.
In each case, use small bills and have them pay for what they are buying with their money. This illustrates that money is tangible and things cost money. Plus, most kids think it’s a blast!
Spending Jar
The spending money can go towards the small items they want, like candy or a Matchbox car. Kids might be more than happy to burn through your money but watch the care and consideration they show when spending their own!
Saving Jar
The saving money can go for the more expensive items they’re dreaming of. This container can illustrate that sometimes you have to wait to get what you want. But don’t expect too much patience from a four-year-old. If the toy they are eyeing is pricey, offer them bonus chores to help them save faster. But don’t fall into the trap of offering more money for the same effort.
Sharing Jar
The sharing container can go to a cause or someone in need. Giving to others feels good.This introduces the concept of charity. My son loves giving old toys he no longer plays with to other kids. The act of giving to others makes him feel good, and I love seeing my child acting with generosity and kindness.
From Age 6 to 10
Teach them about value, price, and financial decisions. By this point, kids notice that you don’t always pay for your purchases with physical money. They also have recognized the impact different incomes have in cars, houses, and toys without understanding why some people have bigger and more of all three.
Goods Vs. Services
This is a great age to talk about your money choices. Explaining your purchases for physical goods is a simple first step. If you opt for the generic paper towels over Bounty, talk about why you made that choice. Explain that they cost less but work the same. Clip coupons and show them how it can save you money. Take them shopping and give them a low budget, hand them four dollars and turn them loose.
Additionally, you should talk about the money you spend on more abstract things. My son loves his Kindle Fire. He got the tablet for his birthday last year and understands that the device cost money. But he did not understand that Freetime, the subscription that provides books, movies, and games on the tablet, also cost money. This is the difference between goods and services. The Kindle is a good, the Freetime that gives him the content on the tablet is a service. This example helped me explain the concept to him.
Perspective
You also must put money into a perspective a child understands. In my household, when my son asks for an expensive item (like that new Nintendo Switch game he just has to have,) we relate the price to something he can identify. The tooth fairy gives him two dollars for each lost tooth. The new game he wants is $60, which means he has to lose 30 teeth to buy it! The example gives him pause, and he thinks back to how few teeth he has lost so far (5) and how long it took him to lose them (2 years). This puts perspective on how much that game really costs.
Needs Vs. Wants
We also often ask him if this is something he wants, or something he needs. He’s still hazy on the difference, so I will often ask him, “Can you eat, sleep, and go to school without this?” The answer is almost always yes and I point out that this is a want not a need.
From Age 11 to 13
Money has consequences, and now’s the time to teach them that. In their pre-teen years, we want to give them a better grasp of credit, interest, and financial identity.
Charge It!
We live in a world of charge cards, Apple Pay, Paypal, and Venmo. Most of our purchases are cashless. This creates a certain amount of detachment from your money. I know adults who struggle with this.
A 2000 MIT study showed that people will spend up to twice as much money on the same item when they pay with credit cards instead of cash. This is a very dangerous realization. One way you can more safely introduce the concept of credit is giving your child a prepaid, reloadable card. You can pay them their allowance on the card and have them keep track of their balance.
Kids need to understand debt. The best way to give them this knowledge at this young age, is to share your personal experiences with debt. Ever done a lot of shopping and had your eyes pop at the balance when your credit card statement arrived? Even if you had the cash to pay off the balance, seeing how quickly debt accumulates is jarring.
Budgeting & Banks
This naturally leads into a conversation about budgets. Yes, this is a topic no one likes, but I think everyone will agree it is vital to financial success. Kids need to learn to keep track of what they spend and earn. At this age, kids are impulsive and driven by what they want now.
When my brother was thirteen, he wanted a pair of expensive jeans. My dad is frugal and told him the only way he could buy them was with his own money. He saved for weeks, doing yard work for the neighbors to earn a little extra. Heck, he even took a few babysitting jobs, that’s how much he wanted those pants. And then the new Beastie Boys CD came out and while he was at the local Sam Goody buying it, he blew all his money on music.
He regretted spending his hard-earned money in an ill-considered shopping spree. But he learned. Kids will too. Sometimes these mistakes are the best lessons. Let them make their own mistakes.
This might be a good time to move their savings to the bank to teach them about interest. You also want to tell them that interest works both ways, on savings and credit card debt.
Finally, the tween years is a good time to talk about identity theft. You may monitor computer use at home, but if your child has a cell phone, they have something that is largely out of your control. Explain the dangers of social media, and public wi-fi.
From Age 13 to 15
This is the time to take off the training wheels. By this age, if you’ve started and continued the conversation about money and finances, kids should have a good foundation. They’ve done their time on the Big Wheels and can graduate to a ten-speed.
Kids at this age are more independent. This is when summer “jobs” come into play. From babysitting to extra chores, let them work for their money. Earning their own salaries is one easy way to teach them the value of time and effort.
While the money comes rolling in, kids should utilize their bank account (and if you haven’t opened a savings account for them yet, now is the time.) You may even want to let them invest a little of that money in stocks or bonds.
But most importantly in this age range, let them sink or swim on their own. They are fighting for their independence, let them have the freedom to win or lose. Don’t bail them out but help them identify any mistakes so they aren’t repeated.
From Age 15 to 18
Ah, the latter part of teenage years. The “real world” lies just around the corner. Most kids get their first real jobs in this window. They learn that each dollar they made does not end up in their hands.
As Rachel Green on Friends put it, “Who’s FICA? Why’s he getting all my money?” Welcome to the world of paying taxes. And now that they’re paying them, they’ll also get to file their income taxes. Another introduction to grown up life. It’s also a great time to get them in the habit of saving their tax refund (if they have one), instead of going on a shopping spree.
High school years are also the time they begin their college search. Discuss the cost of college or trade schools and the value of an education. Student loans are one common way to pay for additional education. This is one debt that is an investment in their future, just like an auto loan or a mortgage.
College, auto, and home loans are generally considered good debt. And kids need to know the difference between good and bad debts. Credit cards and payday loans can be bad debt, especially if payments are missed (which is true of missed payments on good debt as well). And this is where the Credit Score and Credit Report conversation should happen.
When kids start out, they’ll often face a low score because of lack of credit history. But length of credit history is only one part of the mix and they need to understand the pieces that will determine what will be available to them.
There are apps that allow you to check your credit score regularly. Mint is an Intuit budgeting app that allows a fairly comprehensive view of their finances, including their credit score.
Start Early, Keep the Conversation Going
Financial literacy in this country is lacking. A 2016 FINRA study showed that only 34 percent of Americans can answer four or more, out of five questions, on basic financial literacy correctly. Starting the conversation early and keeping it going through the childhood years may help instill the ability to weather difficult times, avoid financial mistakes, and provide invaluable confidence.
There are many other ideas on what and when to talk to your children, this article represents only a handful of them.
Here are a few articles with these and other suggestions:
The Simple Dollar - How to Teach Kids About Money, from Toddlers to Teens
PBS News Hour – Money habits are set by age 7. Teach your kids the value of a dollar now
Montana Financial Education Coalition - Many money habits are set by age 7
CNBC - I’ve been in finance for 30 years—and this is how I teach my kids about money
CNBC - Warren Buffett: This is the No. 1 mistake parents make when teaching kids about money
Forbes - The 5 Most Important Money Lessons To Teach Your Kids
We invite you to share this article with your loved ones who have young children or grandchildren.
Written by Lisa Angelo
