How to Financially Educate Your Children

By Nora Dunn on 8 October 2008 (Updated 31 October 2012) 10 comments
Photo: GoodNCrazy

You have the power to create and mold your child’s financial imprint. It is through your own actions, discussions, and attitudes towards money that your children will develop habits — both good and bad — that will carry them through and last a lifetime. They won’t learn it from anybody else; finances are not taught (at least not thoroughly enough if at all) in schools, and nobody else is going to show them how to succeed in life and avoid the huge financial pitfalls that lurk around every corner.

So do your child a favor and give them a huge helping hand! Here are a few ways you can help them create a healthy relationship with money:

1. Don’t Bribe Them With Money

By offering money as a reward for good behavior, your kids will learn that money is an end, instead of a means to an end. Try rewarding them with tangible life-enhancing experiences which the money would buy, like taking them to the movies, or out for a family lunch. Better yet, you can reward good behavior with things that don’t require money like having a sleepover with friends.

2. Go With the Flow

If your child wants to count the coins in your purse, let them. Use the opportunity to help them understand what each coin is worth and their relative value. You may even help them identify what each coin can buy (if anything). If they receive birthday money, then talk about the benefits of opening a bank account. As money works its way into your child’s life (and it will), use the opportunity to talk to them about it.

3. Allowances: Stick to the Plan

If you give your child an allowance, be exact and consistent with the amount and timing of each payment. This will get them used to timing and managing their income stream, as they will need to do when they later have jobs and careers.

4. Allowances and Pocket Money: Pay Yourself First

The best way to get your kids into the habit of paying themselves first is by doing it right from the beginning. Discuss long-term and short-term savings, and encourage them to put at least 10% of their allowance either in a bank account or even a piggy bank. The piggy bank option will require additional discipline (on their part) not to delve into it for candy, and could go two ways. On one hand, irresponsibly accessing their long term savings (maybe they are saving up for a video game) may affect their ability to reach their goals; a great lesson to learn — the hard way — early on in life. Then again, using a bank account instead may take just enough of the impulse urges out of their hands to help them achieve their goals and feel the satisfaction of getting that video game after saving up for it.

5. Put a Positive Spin on It

Even if you don’t have a positive attitude towards your own money matters, don’t allow your children to inherit this unhealthy disposition. Don’t let them associate money with anxiety or stress. Instead, teach them practically how money can help achieve their goals and get the most out of life through avenues like creating financial independence, creating a better world with charitable contributions, and even giving it to loved ones. Again try to stay away from the idea that money is an end or is happiness in and of itself; instead show how money can be a conduit to positive things.

6. Talk About It, Lots!

Money is not a taboo subject, even though we may have been raised to believe it is. If you aren’t comfortable telling them how much money you personally have in the bank (either because you believe you are not a shining example or because you simply don’t want to), then that’s okay. But when your child asks why you can’t go to Disney World, this is an opportunity to discuss the household’s budget, the cost of living, vacations, and entertainment. Involve them in the family finances, and they will learn to take ownership naturally — a skill that will take them through life.

Money Milestones

Involving your kids in the family budget when they are only three years old may be a bit of a stretch. Instead, consider these money milestones as a way of incorporating finance education seamlessly into their lives.

Coins

When your kids start to become curious about pretty coins and money in general, educate them as to the value of coins and what they can buy. It also makes a great lesson in math: start with pennies as building blocks, then introduce higher value coins as their numerical repertoire increases.

Bank Account

As soon as pocket money and birthday gifts start adding up, take them into the bank to open an account. There are lots of child-friendly accounts out there, so make sure you actively involve them in the process. They will derive great pride from having their own account. This is when you start to discuss the concept of earning interest on savings.

Budgeting

Now that they have a bank account and the ability to save up for things, it is time to start budgeting. If they receive an allowance, hopefully they are already paying themselves first and putting away at least 10%, as with money received as gifts.

They are also probably talking about toys they want (like video games). So help them budget for it! With pen and paper in hand, help them construct a budget by determining how much their toy costs, figuring out how much they currently have, and calculating how long it will take them to save up for it. Seeing the plan on paper may encourage them to save more than just 10% towards their goals, depending on how motivated they are. Again, this is a great exercise in applicable math.

Extra Income

Let’s say your child is now motivated by their budgeting goals, and eager to reach them sooner. You could consider paying them extra pocket money for additional chores performed (they call this “overtime” in the working world, and it is outsourcing for you!), or help them if they want to earn money entrepreneurially. Teach them good business principles if they come to you wanting to open a lemonade stand, and help them to launch their enterprise successfully, starting with a solid business plan.

Investing

As your child continues to understand and appreciate the delayed gratification of saving and budgeting, and has a good handle on the interest their bank account earns, they may be ready for something more. Talking about various investments is the next step. A small lesson in big business and stock investments could turn into a game, as they follow the share price of companies they are familiar with, like Coca-Cola, or Disney.

Although having them invest their hard-earned pennies in the stock market is not recommended just yet, you could set up a mock investment account, and get them to follow the value of their money along with the stock (again, a great lesson in applicable math). Even if they forget about it for a while, a reminder a year or so down the road that they had “money” invested and what it is now worth may lead to a pleasant surprise about market growth; or conversely a rude awakening about market downturns.

Family Finance

As your child gets a good grasp on the above financial matters (they will likely be in their teenage years by now), it is time to involve them actively in the family budgeting and finances. Help them to understand what their own short term and long term goals are, such as the cost of higher education (even if you plan to pay for it), and eventually getting a car (or conversely what their alternative transportation options and costs would be), housing, and the cost of getting set up comfortably to live on their own (and hopefully, before the age of 35)!

When it comes to family vacations, involve them actively in the process, by working out with them the cost of various vacation options and funds available, and then decide together what the family would most enjoy doing. Budget together for excursions and souvenirs, and your kids will take ownership of the trip and learn to appreciate the experience so much more. Not only that, but they will be much less likely to try to guilt you into unreasonable expenditures since they already know what the budget is; they may even help other family members to stay on track!

You may not see yourself as the world’s best financial example. But this is no reason to sit back on your haunches and do nothing; in fact this will only increase the chances exponentially that your kids will follow suit! Instead, be prepared to come clean with your own mistakes, and celebrate your victories, in order to help your kids learn from you and start their own financial lives on the right foot.

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Guest's picture

We've committed to teaching out kids all the things about money that we weren't taught growing up. Since we homeschool, this is even easier for us as we tie it in to their schooling. Also, owning several businesses has helped us show them the value of money and the value of hard work, commitment, and goals. While we don't give allowances, our kids have plenty of ways to earn income by supporting and working in our businesses.

Guest's picture
Miranda

Thanks for the great advice. We are teaching our son about money right now. It's a great experience for all involved. We do give him an allowance, since I hate to pay him for chores he should be doing as part of a family. But he's only 6 right now. As he gets older, we'll have extra jobs for him to do so that he can earn money.

In the end, I think that the important thing is that you teach your kids how to save and spend their money wisely.

Guest's picture

Great article and comes at a pretty good time. We as parents need to take the steps to teach our kids about money.

Who knows what the future is going to look like but if we can teach our kids to be financially frugal they will have a chance becoming financially independent.

Guest's picture
cavale

How do you feel about stealing money from your child's piggy bank and saving account?

That's the way I was raised, anyhow.

Guest's picture

Excellent article. Involve them also in the process of why people work (for money), and how the parent's efforts directly help their kids. Gratitude is an important outcome that kids can learn and develop a healthy attitude from. -Lee from www.cheaplee.com

Guest's picture
Guest

Wish my parents had read this article when raising me. Money was a taboo subject and I never had a budget or allowance. When I needed money I went to them and they gave it to me. Not a good way to be raised. I had my own issues when I got to college and there were so many credit card offers. Oy Vey! Now I'm much more in control and I will talk about money with my mom but my dad still won't open up about money matters. His parents never talked money, their parents never talked money, etc etc. I'm glad I will break that way of thinking when I have a child.

Guest's picture

Thanks for a great Nora,
It never ceases to amaze me how with our kids things are more caught than taught!!
I do however believe that we need to find ways of teaching them about money praticularly as there is a concerted effort now to get them to live beyond their means by offereing cheap credit and bombarding them with consumer marketing material.
Even if credit dries up it will only be a short term issue because people use debt as a means of making a living i.e. banks , credit cards etc and therefore as soon as they can they will try and sell into new markets i.e. our children.
I know the four big banks in our country all try and get children to open accounts with them for the purpose of depositing money but in the end it is to win them over to other financial products in the future.

Guest's picture

Thanks for this excellent article! I think my parents did everything on this list, except for the family vacation planning part. I cannot thank them enough, as I've been managing my finances since I was a pre-teen, and was financially independent by the time I went to college (with the help of financial aid). Now in my mid-20s, I have no debt except for student loans, I've maxed out my 401k and Roth this year, and am saving for a down payment on a house.

When I have children I am definitely raising them to be similarly financially responsible, and you've laid out the steps in a very organized fashion.

Guest's picture

You did a great outline for the majority of people and I think this post is very helpful. If only everyone heeded this advice.

One thing I'm still looking into is the 529 programs for NYC. I think tax incentives are great, but having a good fund manager is more important. Too bad there is no low cost index funds for some of these programs. Would appreciate further info from anyone with more knowledge about this.

Guest's picture
Guest

Hi all,

I think the tips here are great! Given the current economic crisis, I have been thinking a lot about how we teach our children about how to handle money. I was looking at some products to help me teach my kids to make decisions, but nothing seemed great. I started thinking about developing something that would really support people teaching kids about how to use an allowance, track how they want to spend their money, make sure to set aside money for charities, etc.

I would really appreciate it if people from this group would give me some of your thoughts about helping teach kids about managing money – I put together a quick survey just to see if what I’m thinking about would be interesting and helpful for people. If you have any comments about what could help you, it would be great! The 10-question survey is linked here for you – it’s a quick one!

Thanks so much for your time!!! I hope we can help raise a new generation of kids who are smart about their money!