What is one of the best gifts you can give your children? No, it is not the latest toy or electronic gadget, it's teaching them sound personal finance skills. As a father of four kids, this is a gift I provide to my children just as my parents provided it to me. A 2012 study from the Allstate Foundation found that 86% of teens surveyed learned their money management skills from their parents. Are you teaching your children smart money management skills? If not, below are some tips based on the age of the child.
When to Start Teaching Your Kids About Money
Start the process of teaching your kids about money when they are young. Some experts recommend starting as young as four or five years old to teach them the concepts of earning, spending, savings, borrowing and sharing. The earlier you start the sooner the child will develop smart money habits. Play fun games at home such as grocery store or Kids' Monopoly where they can learn the differences between money denominations (coins, dollars, etc). (For related reading, see: What Are You Teaching Your Kids About Money?)
Financial Lessons in Elementary School
Young children will learn from example so it important you set a good example. Explain the difference between a need and a want and that you can’t buy everything. Help them realize you need to make smart choices with your money.
The primary question to ask during these years is if you should give your child an allowance. You’ll find studies that argue for and against it, but my personal experience is the sooner you teach your children good money habits the better. Therefore, once they can understand the concept of money an allowance is a good idea. Another question is whether they need to earn it through chores or if they receive it no matter what. This is a personal decision, but many argue you need to “earn” the money in the real world through a job so why not at home. Finally, how much to give. This typically depends on the child’s age, and $0.50-$1.00 times the child’s age per week is a good place to start.
Should your child open a bank account? It depends on how much money they have, but I prefer the save, spend and give jars at this age. The book, The Opposite of Spoiled, by Ron Lieber, walks through this concept in greater detail, but physically seeing the money may make a bigger impact. The author also stated that children who are not spoiled have values such as curiosity, patience, thrift, modesty, generosity, perseverance and perspective.
Middle School Years
Once again, setting a good example is very important as the toys purchased in elementary school will turn into expensive electronic gadgets in middle school. Middle school is a great time to teach self-discipline and encourage a savings plan to buy a big item (e.g. iPhone, clothes or video game). One example of self-discipline is called delayed gratification. Carl Richards called this the 72-hour rule. If your child really wants something new, tell them to wait 72 hours to see if they really need it. They’ll quickly realize that the hot new item is not as important after all.
Finally, your child is now old enough to understand the benefits of charitable giving. They could use their “give jar” to support a local charity or give away unwanted clothes or toys to others who need it.
High School Years
First, don’t expect your child’s high school to teach your children money management skills. Currently, only 14 states have some sort of personal finance in their curriculum. A recent national survey conducted by H&R Block found that 75% of teens said their most important source of money management skills was their parents. In fact, 62% of their teens view their parents as good money management role models and only 4% as bad examples. Therefore, once again it is important to set a good example and communicate openly about money. You’ll be making big decisions about a car and/or college, so it will be important for your child to understand the financial impact of these decisions.
High school is also a great time to explain how credit cards work and the risks of taking on too much debt. You can log in online and help them verify transactions to avoid identity theft. (For related reading, see: Is Your Child Ready for a Credit Card?)
Finally, high school is a likely time for your child to get their first job. I know my experiences delivering newspapers and working at a local airport helped build character and responsibility. Unfortunately, given the pressures of college, the number of summer jobs have declined, but it is still an excellent experience.
The College Years
Before your child leaves for college, discuss the funds you’ll reimburse. I wouldn’t recommend sending them a lump-sum check all at once, rather disburse it every couple weeks to help them manage their cash flow. Continue to communicate the dangers of credit cards and help them get a free credit report annually to confirm all their debt has been paid off. Help them set-up a monthly or weekly budget to keep track of income/spending and teach good long-term habits.
It is important to start communicating personal finance skills to your children early. They’ll learn money management from you, so it is imperative to set a good example. Why do this? If your kids grow up to be financially irresponsible adults, there is a fair chance you will ride to the rescue. After supporting your children through college and saving for your own retirement, are you prepared to continue providing assistance? Most parents aren't, so provide smart money management skills to your children now so you don’t have to later.
(For more from this author, see: Don't Let These 10 Mistakes Ruin Your Retirement.)
This article is also available via podcast.