At some point in their adult lives, often when they're first starting out, many parents have had to learn the harsh consequences of poor money management. It could be the month you fell behind on rent payments or the time you got in over your head with credit card debt. If you want your kids to avoid those same pitfalls, you need to start teaching financial literacy sooner rather than later.
Research, including influential work by David Whitebread and Sue Bingham of the University of Cambridge, suggests that many of our financial habits are set by age 7. If good habits aren’t formed early, it becomes harder and harder to point your offspring in the right direction.
How, then, do parents teach the value of a dollar and other key financial lessons? Here are some basic steps you can take immediately to put them on the right path.
- Having kids earn their allowance through household chores can help them build the self-reliance they’ll need later in life.
- Opening up a savings account or kid-friendly debit card teaches the value of saving and provides an introduction to the banking system.
- Allowing your kids to observe budgeting discussions can help them learn how to spend responsibly and achieve cooperative solutions.
Make Them Earn Their Allowance
Regardless of their age, one of the most important lessons you can instill in kids is that money is a finite resource. When they have to work for their money—as you likely do—they’ll learn to use it more carefully.
A lot of parents are in the habit of supplying their kids with a weekly allowance, which in itself can help teach budgeting skills. Even better would be making them earn that money by doing chores. Drawing the mental connection between income and personal effort is something that will pay huge dividends when they grow up and fly the coop.
These days you don’t need a big bundle of cash in your wallet to compensate them for the odd jobs they perform around the house. Apps such as BusyKid let you assign a dollar amount to each task, which adds to their allowance total.
Encourage Part-Time Gigs
High school can be a busy time for adolescents, with homework and extracurricular activities eating up a substantial part of their week. Still, if they can spare just a few hours to work at a coffee shop or retailer, they’ll probably be better for it. For one thing, they’ll be less inclined to blow their cash on frivolous things when they have to put in some serious work to get it.
You don’t need to wait until they’re old enough for formal employment. You may find that your middle schooler or early high schooler can earn some extra bucks by mowing lawns or walking the neighbor’s dog. Websites such as Nextdoor and even the newsletter from your homeowners’ association can be effective ways to connect with local residents in need of a little help.
At the point that they start earning an actual paycheck, you can also help them open a Roth IRA with some of their earnings. If you can, consider helping out with some matching money. That's a another life lesson you can help them learn early. And it's a good chance to introduce the concept of the time value of money.
Have Them Contribute to Purchases
Nearly every parent knows what it’s like to take their kids to a store and be inundated with requests for various toys or video games. Perhaps that shouldn’t be a surprise. Younger kids, in particular, don’t yet understand that there’s only so much money you have each month to put down on discretionary purchases.
One way to get the point across is to make them contribute toward these nonessential items. If it’s not their birthday or Christmas, tell them that they have to pay half the cost for a new Lego set or an American Girl accessory. Your kids will get a better sense of what things actually cost, which is important. They’ll also learn that they have to save up their allowance to make bigger purchases and that they have to prioritize, just as you do.
Make It a Game
Who said learning about finances had to be boring? Even board games can help kids learn the importance of thriftiness.
Payday is among the best for teaching kids valuable money management skills. With the next paycheck a month away, players have to make their money last. They can purchase items they think will make them a profit and even take out loans, but getting in over one’s head can create problems, especially when there are other bills to pay. Sound familiar?
Even Monopoly can yield some pretty important lessons, with participants choosing which properties or buying strategies will yield the biggest payoffs and measuring risk versus reward with every move they make.
Open a Bank Account
The venerable piggy bank is a useful savings vehicle for younger children, but when they hit elementary school, consider opening a kids account at an actual bank. It’s a good way to instill the importance of gradually building up their balance, and it gives them an introduction to the banking industry to boot.
A more modern approach is to get your preteen a kid-friendly debit card, such as the ones that Greenlight and GoHenry offer. Kids can earn money through chores or an allowance and then use the cards to make purchases online or at a store. They’ll soon realize just how quickly their account balance dwindles when they overdo it. Both products put an emphasis on transparency, giving parents the ability to control where kids can use their card and sending notifications after each purchase.
Get Them Started on Stocks
One of the keys to long-term financial health is knowing how to invest wisely in stocks and bonds. If your kids can learn some of those tools well before they start their first full-time job, so much the better.
One way to do it is to open a small custodial account at a brokerage for which they get to help direct the investments. There’s nothing like first-hand experience to teach them about the volatility of different investments and the need for a long-term outlook. Eventually, those assets will fall under their control when they reach the age of majority.
Conveniently, apps such as the above-mentioned BusyKid let children purchase shares of companies, such as Disney and Netflix, right from their bank account, making it easy to become a participant in the stock market.
Have Honest Conversations About Money
Perhaps the most important thing you can do to boost your child’s financial literacy is to be open and honest about your family’s finances. Parents often worry that being too candid will only lead to worry, especially if they are going through a job loss or other stressors.
The reality is that somewhere down the line your kids will face hardships of their own. They’ll be immeasurably better equipped to handle them if they know how to respond. That doesn’t mean you need to share your bank statements, but you might find it’s helpful to talk about the need to stick with your budget and cut back on certain nonessentials during lean times.
Kids tend to be a lot more perceptive than parents realize. If they see you making prudent decisions, they’re likely to imitate those behaviors later in life.
The Bottom Line
Good money habits don’t form out of thin air— they have to be learned. By starting when your kids are still small, they’ll be better equipped to manage their finances in adulthood, when there’s a lot more at stake.