Over the years I’ve worked with many people who graduated from college without a clue about money. They didn’t know how to budget, couldn’t tell if they were getting a good deal on a purchase, and ran up credit card debt because they didn’t understand how credit works.
Unfortunately, financial literacy isn’t taught in schools — and many parents don’t teach it at home, either.
It’s tempting to shield kids from difficult topics like finances, especially if you have a negative relationship with money or your own parents didn’t serve as the best example. But your kids are going to notice that things cost money (and some people have more of it than others) at a surprisingly young age. You can teach them about money in age-appropriate ways, from the time they’re in preschool to when they’re heading off to college.
For a really great resource, check out Ron Lieber’s book, The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous, and Smart About Money.
Preschool and Elementary School
Any time a young child receives money as an allowance or from a holiday gift, it’s a teachable moment. Ask them about the big things they want to save for — an expensive toy? A gift for a friend? Talk about how some purchases are easier to afford, and some are so big that you have to put away a bit of money on a regular basis to buy the big purchase later.
While people use cash less often now, I think young kids benefit from seeing their money in cash. It feels more real! They can count it and see how big their money pile grows over time.
It’s also a great age to teach kids the difference between a penny, nickle, dime and quarter. Also, the different dollar bills and how many quarters add up to a dollar, and so on.
A fun craft project for younger kids is creating piggy banks — you can even repurpose some jars or shoeboxes and help your child decorate them! Make three containers labeled Give, Save, and Spend.
FUN PROJECT: My Associate Planner, Alex, has two young kids and created a system I love: The Mommy Store. She has a stash of small toys and other items, and when her toddler wants to spend his allowance, he can count his money and “buy” a toy from her. It’s a great way to teach a very young child about how to buy things without overwhelming them with all the options at a store.
Learning to Give
Help instill the joy of giving from a young age. Have your kids pick a charity that means something to them — maybe the shelter where your family adopted your pets, or an organization that helps kids their age.
Their Give jar money can be donated directly to the organization, or you can go with your child to buy items to donate (like blankets for an animal shelter, or toys for a holiday gift drive). Talk with them about some of the charities you choose to support and why they’re important to you.
Start a savings account for them with the money they save. Online banks make this easy, but your kid might love taking their cash savings to the bank to deposit. Plus, banks usually have lollipops. It’s the little things that make banking exciting!
By the time they’re pre-teens, your kids will really begin to pay attention to status and compare their lives to their friends’ lives. They might ask you to buy them expensive designer clothing, for example, because their friends wear those labels.
At this age, you can begin teaching your kids about opportunity cost. You have a finite supply of money, so when you choose to spend it on one thing, it’s at the expense of being able to afford something else. And sometimes being able to afford the things you need means you can’t afford everything you want.
Work out with your kids what you’ll pay for, and what they’re responsible for paying for with their allowance. For example, they might be on the hook for birthday gifts for their friends, or the cost of joining friends for dinner out or a movie.
You can teach your kids modern money management by moving away from cash at this point. One method is to use Venmo. Transfer a set sum of money to your child, and they can use it to pay for things — and you’ll have a record of how they spend their money. You can also set up a checking account for them and transfer money into that. They can use a debit card to make purchases.
Consider disabling the overdraft option on this checking account. That way, their debit card will simply be declined if they don’t have enough money. This will help prevent your kid from spending more than they have, which can create bad credit habits when they’re older.
High School and College
Teenagers are just a few years away from taking over their finances, so high school is a really important time to teach your kids higher-level lessons.
Talk to them about credit and debt. Credit card companies swarm college campuses and make it easy for students to sign up — and far too many don’t understand what happens if you charge more to your card than you can afford to pay back.
You can ease them into using credit cards, and help establish their credit score, by making your child an authorized user on your account or co-signing a low-limit card for them. Teach them how to read their credit card statement and check for erroneous charges. Online debt calculators like this one from Credit Karma can help you show your kids how long debt repayment can take (a really great lesson if they want to take on loans to pay for college!).
Keep up the talks about opportunity cost. You can be a bit more forthcoming with teens about your family’s financial situation and why you’ve made certain choices. You can even tell them about some of the mistakes you’ve made and what you did to correct them.
Pro Tip: If your child has earned income, they’re eligible to contribute to a Roth IRA.
Whether your child is a paid actor or your teenager has his or her first job, this is considered “earned income” and your child can now contribute to an IRA. Since they’re probably in a low tax bracket, I’d opt for a Roth IRA over a traditional IRA.
Getting them into the habit of saving for retirement at a young age will pay off big time when they’re older. A friend of mine has a Roth IRA that she started in college because her mom matched her contributions.
When she graduated and began working full time, she started contributing the full amount each year (which is currently $5,500) because she was already in the habit of putting money into her Roth IRA. She’s in her early 30s now and has more than $100,000 saved in that account. The average IRA balance for people in that age range? Just over $20,000. Start ‘em young!
You can offer to match your teen’s savings goals dollar for dollar, especially when it comes to saving for big purchases like a car or college savings. That gives them an extra incentive to save, so when they’re offered a 401(k) with an employer match at their first job, they’ll already know how beneficial that can be.
Turn Your Kids Into Money Mavens
Have lots of money talks with your kids. It’s an ongoing, evolving conversation that will set them up for success when they’re in their early 20s and beyond.
I know that money is hard to talk about, especially if the subject makes you uncomfortable. But it’s much better for your kid to learn from a $20 mistake when they’re 10 years old than a $10,000 mistake when they’re 25.
Money management is just as important as learning to drive a car, cook, make household repairs, or write a cover letter. It’s an essential life skill that will help your child grow up to have the security to pursue their dreams. If you have kids, start those money talks today.