As your kids grow, you teach them many different things–how to dress themselves, how to do their homework, how to ride a bike. Teaching kids about money is a process that can start when they are two or three years old and should continue until they reach independence as adults.
When kids are two or three, they will begin to notice that people use money to buy things when they shop. Some kids may begin to want to buy things themselves, and you can help them by explaining what different coins are called and letting them pay for items when they are at the store with you.
Although kids this young won’t have much of a concept of how much a dollar or a quarter is worth, it’s not too young to give them a few very simple chores that they get paid a small amount of money to do. The sooner you can introduce the idea that money is something you get by working, the more ingrained that fundamental financial principle will be in their minds.
Building a Foundation
There are a few basic ideas about money that are important to teach kids at any age. The idea that money comes from work is important so that they understand you aren’t just going to give them money whenever they want to buy something.
Another important thing to teach kids about money is that it’s limited. Even kids in elementary school can understand it when you tell them you have a budget and you only have a certain amount of money to spend on an item because you need the rest of your money to pay the bills.
Saving money is another fundamental financial principle that is important for kids to understand as they grow. You can share your efforts at saving with your kids and show them that when the car breaks down or someone sprains an ankle, the money you saved can be used so that you can still afford to pay your other bills.
Each family has particular values around money that you can communicate to your child as they grow up–in fact, you probably will convey messages about money to your child even if you don’t intend to, which can be a negative thing if your own relationship to money is not entirely functional. Working on your own money management can be a gift to your child, since they will tend to absorb lessons from your example whether it is a good one or not.
Should Kids Get an Allowance?
Most experts agree that giving kids an allowance is helpful in teaching them about money as they grow. Some feel that giving kids a certain amount of money, such as a dollar per week for each year of their age, is a good guideline, while others tie allowance to chores.
One of the great things about giving kids an allowance is that it provides an answer to their frequent requests to buy them things they don’t really need. As parents, you provide the basic necessities of your kids’ lives (and sometimes a lot more than that), but giving them an allowance will teach your kids to prioritize their wants and make decisions about how to spend their own money – these are lessons that they really can’t learn in any other way.
The amount of allowance to give your kids can depend on many factors, like your own income and what you want them to be responsible for buying. One way to teach financial management that kids may use for their entire lives is to set up three containers for their money so they can decide how much of their allowance to save, spend and give each week. It’s important to guide kids in making these decisions, but also, to let the ultimate decision (and consequences) be theirs.
The Art of the Deal
As kids get older, they will begin to realize that stores may have different prices for the same item. Showing children how to comparison shop and find the best deal will help them get more for their money and teach them valuable lessons they can take into adulthood.
When your child decides she wants an item and has the money to get it, you can make suggestions about where to compare prices and help her look the item up on eBay or Amazon to see if it would be cheaper to buy it there.
Comparing a used version to a new one where it is available can be another way to help kids understand their options and decide how to spend their limited funds.
Most kids eagerly embrace bargain shopping because it allows them to get more of what they want with the money they have, and who doesn’t like that? By the time they begin working, the concept will likely be ingrained in their habits and they can continue to save money.
Yard Sales and Thrift Shops
If you have yard sales in your area, you can take advantage of the sales in various ways. Yard sales can be a great way to teach kids about frugality and getting the most for your money. Yard sales are a great source of kids’ toys, and kids tend to get very excited when they can get something they want for a fraction of what it would cost in a store. As trends recycle, it even becomes possible to get toys from yard sales that are no longer available in stores at any price, and it is a perfect way for kids to make their limited allowance dollars go much further than they could otherwise.
Yard sales and thrift shops can provide a reality check for kids, making them realize that it isn’t always necessary to spend a much higher amount on something new when there are lots of great things people decide they don’t want anymore and offer up at pennies on the dollar.
Should Kids Work?
Kids often find that their wants far exceed their allowances. Finding ways to make money, even at a young age, can help them bridge the gap between their allowances and their wants in a productive way. Kids as young as 5 to 10 years old can bring in money by doing extra chores beyond their usual ones, doing extra chores for Grandma or a neighbor, or by selling the toys they have outgrown at a yard sale or on eBay (this is a great motivator for cutting down on clutter as well).
As kids get older, they can begin to babysit, mow lawns, or with parental help, sell items online to earn some spending money. As a parent, anything you can do to help your children earn their own money will reinforce a strong work ethic and help them continue to learn lessons about money that will help them when they are adults and on their own.
When kids develop a steady stream of income, it is not inappropriate to expect them to spend their own money to go on outings with friends, or even to buy their own clothes if their tastes are a bit above what you think is reasonable. If your family struggles to make ends meet, kids will fee a sense of accomplishment to pay for some of their own expenses and in this way, contribute to the family. Communicating with your kids what you expect from them financially will make sure everyone’s expectations are clear and avoid conflict.
While having a part-time job is a healthy thing for most mature teens, it’s best to limit their hours so that they have adequate time for schoolwork and other interests. Working more hours over the summer can be a good way to save for college or a car, or to pay for car insurance and gas if they already have a car.
Bank Accounts and Credit Cards
Laws in different states vary as to the age when kids can get their own checking account, but parents can open an account with their child when they feel the child is ready to handle the responsibility. Learning how to balance a checking account and writing checks are important skills every adult should know; adult supervision can set the foundation for better finance management as the child ages.
When kids enter college or even before, they will be bombarded with credit card offers from issuers eager to develop the customer loyalty that often happens when people get their first credit card. Credit cards can help students build credit that they may need after college when they want to buy a car, rent an apartment or buy a home, but it’s important to explain to students that their credit score will be seriously impacted if they don’t pay the credit card on time. There should also be a discussion about the importance of not charging purchases they won’t be able to pay off.
This is also a good time to explain how interest works, and how paying just the minimum balance will make purchases much more expensive in the long run. Although most students can get a credit card without a parent to cosign, you may want to cosign one anyway so that you have access to the account and can make sure it’s being paid on time.
When Kids Have Money Trouble
It’s important not to bail your kids out if they overdraw their bank account or max out their credit card–at least not without holding them accountable. While you don’t want to see them make mistakes that will result in a poor credit score and impact their credit at a critical time in their lives, bailing them out won’t teach them that there are consequences for their actions, and they will probably go on to make the same mistakes over and over again.
If you do choose to help them make the situation right, it’s important to make sure they repay you for what you had to spend and to show you that they have learned from the situation by making better choices in the future. In this way, their credit can be protected, but they still learn that there are consequences for poor financial choices.
Teaching your kids about money is a process that will last until they reach adulthood, and sometimes even after that, through the college years when they are still mostly dependent on you financially. While there may be bumps along the road and times you don’t think they are “getting it,” your efforts will help them become responsible adults who have the knowledge and skills they need to manage their money well. And eventually, your kids will pass the same lessons down to their own children one day.