Three steps to teaching your kids about money

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Nick Foy, CFP®

Most kids aren’t great with money. But then again, neither are most parents.

When it comes to teaching kids about money, I find few know where, or when, to start. Not many of us had parents of our own who taught basic financial literacy lessons, and we all know that just about nobody ever receives information about personal finance in school.

A couple of weeks back, the Wall Street Journal ran an article providing some ideas on the topic, but for the most part, the story was focused on teens (and later). But, in order to truly have an impact, I think parents should start teaching basics at a younger age.

It’s tough to get 96% of people to agree on anything, but check this out:

“Some 96% of 128 college students in a recent study said they wished their parents taught them practical skills such as budgeting and saving (emphasis mine).”

I’ll assume the remaining 4% either learned practical skills about money as kids, or were recovering from a late night frat party and didn’t really understand the question.

So when, and how, should parents start teaching their kids about money, debt, and investing?

Here are a few ideas:

  • Start earlier than you think. We’ve gotten off track with our kids, mostly because I haven’t gone to the bank to get more coins, but as soon as our son started asking for things at the store (age 4), we started giving him an allowance. It’s not a big number, maybe $2 per week, but it sure makes trips to Target a whole lot easier. When he starts begging for a toy, I ask how much he has in his piggy bank. If it’s enough, he can choose whether or not he wants to buy the new whatever-it-is.
  • Order things appropriately. Kids (and most adults) need to learn to allocate their income in a way that gives them the best perspective on the power of money. We ordered these piggy banks for our kids. Once a week, we put the coins on the countertop, and talk them through placing 10% of the money into the Share jar, 10% into the Save jar, and the remaining 80% into the Spend jar. The money in the Share jar goes to church on Sunday and ends up in the white boxes. The money in the Save jar stays put; it’s for a big purchase someday, like a house or a car. Money in the Spend jar can be spent wherever whenever; we provide guidance but not many restrictions. If they want to blow it on a toy they’ll use twice, they’ve got to build the jar back up again in order to buy whatever becomes the next latest and greatest.
  • Be open about your finances. Young kids don’t need to know how much you make, or how much you owe on your house (although maybe someday that information would be useful to share), but even at a young age, your kids should know the why behind certain spending decisions. If you decide not to purchase a consumer item of some sort, letting them know that you’d rather save the money, or spend the money on something more valuable is useful.

    “Son, we’re not spending money on the new iPad because we’d rather feed malnourished kids, and take the family on a great vacation.”

    Teaching that money is not an unlimited resource can help them understand your motives, and it forces you to clarify them. It’s hard to lead kids toward a better understanding of finance until your own financial philosophy is well grounded and easy enough to explain to a 4-year-old.

Some additional resources

The Opposite of Spoiled by Ron Lieber
Raising Financially Fit Kids by Joline Godfrey
Your Kids Can Master Their Money by Ron Blue

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