In this post I will provide an overview of how to openly discuss money management as a family and particularly, how to teach your kids about finances.
If you’ve ever worried that your kids might grow up and not be as financially savvy as you’d like them to be, you certainly aren’t alone.
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Household money discussions
According to a 2014 study on Stress in America conducted by the American Psychological Association, only 64% of Americans feel they were educated on money management and 63% reported that they do not regularly discuss money and financial decisions as a family. Additionally, 18% reported feeling that the topic of money was one of taboo and too uncomfortable to discuss in the household.
For many of us, financial education was just not a part of the home or school curriculum. Eventually we figured out how to balance a checkbook and pay the bills on time. Our kids will figure it out as they go, too.
Or, like some of us adults, they will have to learn the hard way. According to the PEW Charitable Trusts, over 80% of Americans are in debt, and the amount of debt is on the rise. Total US household debt is more than $12.84 trillion, more than the total debt during the great recession of 2008.
Financial education should be a part of our kids lives. They shouldn’t go off into the real world making major money mistakes because they didn’t have a strong example or someone to teach them how to manage their money. They certainly shouldn’t be ignorant of money management simply because we as parents were too uncomfortable discussing money matters in the household.
To give an example of how poorly we are preparing our youth for the real world of money management, let’s look at student loans. The amount of money borrowed for college education is over $1 trillion now. Over 42 million Americans use student loans for higher education and 25% of them are behind on payments or in default.
It’s never too early to start teaching your kids about finances
It’s never too early to start. In fact, I wish I had been better about this, myself.
This summer, I sent my son to a week long camp. The camp organization provides a debit account that you load with money when you drop your child off. This acts as their spending money throughout the week. You can leave them nothing, they have all the essentials provided, or allow them to buy snacks and swag gear every day, it’s up to the parent to decide.
Before my son left the house, I told him I would deposit $100 for the week, which would cover the purchase of a camp sweatshirt and hat, and some snacks. We discussed that any money left over would just be redeemed at the end of camp and to not feel the need to spend every penny.
Despite the discussion, things didn’t exactly go as planned. A friend dropped him off instead of me, and with the best of intentions, loaded $200 into his spending account.
This is a “no contact” style camp, I wasn’t going to talk to my son for a full week. So, I figured this would be a good test. Has my all encompassing personal finance nerdiness rubbed off on my child? How would he do with temptation?
Would he save it all or spend it like a boss?
First, let’s take a look at the lessons I have proactively tried to instill.
How to teach your kids about finances
Money lessons used in our home
- This was given every month, separate from chore duties. It was provided via $25/month direct deposit to his own (joint) checking account.
My son manages his own purchases
- He is in charge of his own purchases. No more “can I have this? How about this?” at Target. If he has enough money, he makes that decision. I do have some rules, no food (candy), I have to approve the purchase of electronics, no online purchases (my absolute pet peeve is requests to buy more (insert game jargon) for whatever online computer or app game that he’s playing at the time. No, I will NOT buy you more loot for your minecraft account! I also don’t believe in too much screen time or violent “shooter” games so I won’t approve any spending there.
- If he ever wanted to buy something he couldn’t afford, he had the option to borrow money from me, but he had to pay interest. He learned pretty fast that it was best not to borrow and that the sooner he paid me back, the better.
- When he is given money as a gift or for work completed, it gets deposited to his account and he needs to decide how much gets shifted over to savings, how much he’d like to donate to a cause of his choosing, and how much he wants to spend.
Open money discussions
- I make a point of discussing finances around him. When he joins me at the grocery store, I have him help me with the savings app on my phone to plan out or weekly meals based on the current sales. He helps with building the meals and picking out food. Then I show him how much money we saved during checkout. Then I equate that amount in a way that is relatable, like, that’s how much money we just spent going out to dinner. We can continue to go out to dinner on occasion because we were able to cut costs in other areas.
- I’m open about my earning, spending and investing goals. He is familiar with money conversations.
- I often pointed out the “opportunity cost” of impulse purchases or over spending. He is very good at waiting a few days before making a significant purchase.
Pay yourself first
- He saved over $3,000 and I helped him set up a high interest online savings account and show him how much money he makes in interest. Then we discussed the stock market and I set up a personal investment portfolio for him and show him how his investment is doing every so often. It’s pretty motivating for him to see that he made an additional $120 without actually doing any work. This is the beginning lesson of compound interest.
- I have always stressed the importance of being happy with what you have. Anytime my son tries the line “but so-and-so has it!” I use this as a perfect learning opportunity. There is a difference between having enough and being spoiled and unappreciative of what you do have. We then discuss what it might be like to have less. Less opportunity and less comfort.
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Things that haven’t gone so well
- He worries sometimes that I don’t have enough money because I’m strict with my budget. He often mistakes frugality by choice with not having enough.
- Because his money is in a bank account, he is rarely aware of what he has. He doesn’t ask how much he has and he stopped asking to spend money awhile ago. Somewhere along the way he became comfortable with what toys and games he has and simply waits for his birthday or Christmas to request what he wants.
- I’d rather he was more aware of his money. I also don’t want him to suddenly be aware that he has $3,000 and ask to buy something very expensive, like a laptop or game console when we don’t know what he will really want come high school. I’d also rather be the one to cover these types of expenses, as that’s what I have always planned to do. I think he’s too young still to be motivated to continue saving for a car when he’s 16, so his bank account just doesn’t seem real for him.
Reassess and make some changes
- I plan to establish a home economy system that will make money management more real for him, while actually allowing for mistakes and failures. The cost of failure the older he gets is greater, I want him to fail now and learn how to recover before the stakes are too high.
- Components to this system:
- Monthly income – set amount similar to his allowance
- Monthly expenses
- Extra jobs to earn more
- Beyond his normal chores
- More complex and high earning jobs may require an application
- Rewards to spend money on
- The reason to save money
- Small ticket items that can be purchased with a day’s income up to large ticket items that require up to 2-3 months savings
- I wanted to include a big savings goal, like a family vacation at the end of the year, but I think this puts too much pressure and doesn’t allow for the small failures along the way. Perhaps we can build up to this.
- We plan to brainstorm together some entrepreneurial ways for him to earn money. He has expressed interest but still needs some hand holding.
How to teach kids about money by age group
Under 6 Years old
- Learn patience and delayed gratification. This could be waiting 10 minutes for that ice cream while everyone else finishes up their meal. Or, it could mean waiting a day for the toy they asked for in the check out line.
- Set up the saving, spending and giving money jars. These are physical jars so they can see all that lose change and bills adding up.
- Set a small saving goal that can be achieved.
- Discuss the importance of giving back, this could be as simple as using the money to buy a gift for a friend or sibling. It feels good to give back and we want our kids to understand this.
- Add on some ways to make money and set bigger savings goals.
- Set up a budget and teach them how to keep track of their money. This is where I should have spent more time on. My son could have been balancing a checkbook a long time ago.
- Talk about finances and discuss with them why you make certain financial decisions. While I am very open with my son about my finances, I don’t feel the need to discuss how much I make (because I don’t want him oversharing at school) and I never express stress or worry about my finances. It should just be another topic that is discussed openly in the home.
- Long term savings and compound interest
- Define opportunity cost and how it affects them
- Help them come up with ways to make more money
- Discuss the expense of colleges, compare schools and costs, and discuss the long-term impacts of using student loans.
- Discuss long term savings and compound interest, budgeting and saving.
- Plan for large expenses – a car, computer, travel, housing, college
- By 9th grade you want to have an open conversation about how much the family can afford to spend on college. Will it be covered, do you plan to contribute a certain amount, does your child need to focus on scholarships? Be honest and open and start planning early.
- Teach about credit cards, interest and credit scores.
How did my son manage his $200?
So in the end, how did my son do with a full $200 in his camp spending account? Did he save wisely or blow it all on the first day?
Somehow, he managed to spend it all. Down to the last penny.
I have to give him some credit. I mean, how did he plan for that? Was everything sold in even dollars? I doubt it. So, he was able to do the math and section off his last dollars such that every penny was accounted for. And, he had money throughout the whole camp, spending the last dime on his last day of camp.
I give him credit for managing the amount that he had.
Of course, I give also him an F in Frugality!
How did he spend all that money? He bought one sweatshirt, which naturally was over priced but considered totally worth it to him. The rest went to feeding his posse. Yes, he spent that money like a boss! Every night was snack night in his cabin, treats on him! His friend only had $60 to spend, so my son took it upon himself to make sure that he had enough snacks and treats, too.
So, while I’ve been complimented many a time about how responsible my son is and how much he understands about finances, he clearly isn’t ready to be fully responsible yet. Which is okay. This was a fantastic learning experience. One that cost him $100 of his own money, since we had already discussed that I only planned to add $100 to the account.
This experience also opened up some great discussion about not just money management but self confidence and the fine line between giving and being taken advantage of. And how buying friendships isn’t necessarily the best foundation to build upon.
In conclusion, the sooner your children learn about money management, the better. As they become familiar with spending and saving, delayed gratification and the true value of a dollar, the better prepared their finances will be when they are on their own.
How many money mistakes would you have avoided if you had been more savvy? It’s much easier to make a $100 mistake at the age of 13 than a $100,000 mistake at the age of 25.
Here are the highlights of some valuable money lessons you can start teaching you kids about finances:
- Delayed gratification
- Provide a money jar or account and a weekly/monthly allowance
- Allow your children to make their own spending decisions and purchase what they want with their own funds
- If they do not have enough money, teach them the value of “paying themselves first” and saving up for what they want
- If they still want that purchase or it will take too long to save for, teach them about borrowing money, with interest, and paying that back with regular, recurring, payments
- Separate spending, saving and giving jars or accounts
- Set savings goals and help them stay on track to achieve them
- How to work to earn more money
- Be open and discuss finances regularly with your children
- As they get older, teach them about the beauty of long term savings and compounding interest
- Think about what lessons you have taught your kids already
- How can you add to these lessons?
- What tips from this article can you put into action today?
- Think about what is working right now.
- What could be improved?
- Let me know how it goes!