When you think back to your childhood, what do you remember about money?
Did you receive an allowance? Run a lemonade stand? Get paid for good grades?
How did you learn about money? Who taught you? What shaped the financial habits you have today as an adult?
If you have children of your own, you've no doubt wondered about the best way to teach them to manage money. Everybody's approach is a little different, but, as with all things in life, the sooner we start educating our children about money, the more likely they'll become financially responsible adults.
Here are a few things to keep in mind when teaching your children about money.
RULE #1: TEACH BY EXAMPLE
Our kids learn far more from what we do than from what we say. If you're a parent, you've no doubt experienced the frustration of telling your child "a million times" to put their shoes in the correct place, or turn off the faucet, or close a door. Nevertheless, they continue to need reminders.
However, you have probably heard them mimic your speech or copy your mannerisms without even thinking. Children soak in their surroundings on a subconscious level more than an analytical or conscious level.
Many keep financial decisions hidden from their children. However, it is beneficial to let them see your rational or thought process when making financial decisions. Doing this will give your children language around this topic, a model for critical thinking about money, and a clear roadmap for how to prioritize, make choices, when to say no, when to say yes, how to be generous, use credit cards wisely, and so forth.
Teaching by example is by far the best approach when shaping your children's financial habits.
RULE #2: TEACH IN AGE-APPROPRIATE WAYS
Most elements of financial literacy need to be taught in stages. Your kindergartener doesn't need a lecture on the benefits of a Roth IRA. Here's a general idea of what you can teach your child at each developmental stage:
PRE-K = Basic counting and math
The simple mathematical equation 1+1=2 is the foundation of finance. When you go out to eat, count your child's french fries with them before they eat. Count toys on the floor as you clean up a play area. Count pictures on a wall or shoes in a closet. Count the stairs as you go up and down. Seeing things in quantities will help develop a necessary foundation for future financial responsibility. Also, you can begin teaching your children at a very early age that stewardship requires choosing one thing over another.
Matt White's two-year-old, Ephraim, is very particular about what he wears in the morning. It’s the illusion of control that Ephraim wants because no matter what Matt pulls out of the drawer, it’s a loud "No!" After a few rough mornings of wrestling Ephraim to put his clothes on, the problem stopped when Matt pulled out two shirts and asked Ephraim to choose. Ephraim just wanted the control that comes from saying yes to one thing and no to the other, rather than those choices being made for him. It would be unhealthy to let him choose from everything because, by doing so, he learns that he can get his way and that everything he sees is an option, even if it's winter and he wants to wear shorts. However, Matt can teach Ephraim that out of everything available, there are two options that are appropriate for the weather, and Ephraim can learn at a very young age how to exercise control by choosing between items that are appropriate and meet his needs today.
EARLY ELEMENTARY = Basic facts about money
Kindergarten through 2nd- or 3rd-grade is when kids learn that most things cost money. Until this stage of development, kids see their parents magically appear with new toys or clothes or food and think nothing of what it took to acquire them. But in early elementary, they learn most things come with a monetary value. Younger children should learn the difference between a penny and a quarter, or a one-dollar bill and a ten, and especially what value those currencies have. If you take your kids to the grocery store with you, point out how much the items cost that they enjoy most. If you feel especially brave and there isn't a long line, let your kids help you count out the money at the register before you pay. These habits lay the foundation that the things we buy have monetary value.
Matt and his wife have done this by setting up a "store" in their home each Christmas season. Their children are given a certain amount of money and they are allowed to purchase items for their parents and siblings. By assigning value to the items, their children are taught a couple of important lessons. First, they learn that they cannot buy everything. Financial responsibility involves making the best choice with the money you have. Second, it teaches them that money can (and should) be used for others. It's easy to develop a narcissistic approach to finance for fear of not having enough, but simple exercises like these with our young children lay a groundwork for future generosity.
LATE ELEMENTARY = Start managing their own small sums of money
Around 3rd or 4th grade, most kids are developmentally capable of earning an allowance. Chore charts work well (assigning specific weekly chores to each child). Some families assign specific chores to their children while others provide a list of chores with a corresponding payment value. For example, washing the windows is worth $1, vacuuming the stairs is worth $2, etc.
WM Creative Director, Cory Jones, and his wife have 8 children. They pay their older elementary-aged kids for reading books; $1 for every 100 pages. Besides increased reading levels, this reward system instills the principle that money comes as a result of doing work. If one of their kids wants a new video game but is a few dollars short, they know to ask Mom or Dad to take them to the library to grab a stack of Harry Potter books. This practice also trains their kids to resist instant gratification. By working toward one particular goal (like a new video game) they learn to practice discipline and only spend their money when they have enough to purchase the item for which they've been saving.
MIDDLE SCHOOL = Debit and Credit Accounts
Developmentally, middle school is a critical time in a child's life. It's when most children begin the process of creating their unique identity apart from their parents and siblings. So these years are an especially prime opportunity to make financial responsibility part of your child's self-formed DNA.
It's a great time to open a checking account for your child and teach them the basics of cash flow and how to balance their checkbook. Some banks offer programs for children to open a checking account as early as middle school with a limited balance, and also use a debit card for their expenses.
Middle school is a good time to start learning about credit cards, too. As we've written before, credit cards can actually be a useful tool when used properly. These years are a great time to learn the difference between debit and credit cards, the concept of interest, and begin to grasp the detrimental impact of out-of-control debt.
HIGH SCHOOL = A first step toward investing
Most (if not all) high school students take at least one class on economics that introduces the concept of stocks and investing, which makes this stage of development a perfect opportunity to introduce long-term investing and compound interest.
Some banks and brokers have options to invest in a custodial IRA, opened by parents for their children, that will eventually fall under their child's control when they turn 18, 19, 20, or 21, depending on the bank and/or state. There's not a financial strategist out there who would encourage anyone to wait to invest. It's common knowledge that the earlier you start, the better. An introduction to the benefits of compound interest at this age can provide a strong foundation for responsible investing in the future.
RULE #3 - PUT MONEY IN ITS PLACE
In the New Testament, the Apostle Paul wrote that "the love of money is the root of all kinds of evil." When we give money a dominant place in our lives, or when we let the stress of debt or retirement overwhelm us, it tends to take its toll in ways that matter most. According to a study done by Citibank, 57% of divorced couples said that money was a primary reason their marriage ended.* Money issues take many forms in relationships, but control is often at the center. One partner controls the other using the couple's financial resources, and before long resentment builds and the relationship is irreparably fractured.
As parents, we owe it to our children to instill in them a healthy understanding of the role money plays. It is a resource we use to improve quality of life for ourselves and for those around us. When we intentionally teach our children a holistic understanding of this resource, they can use it in proper ways that lead to stable, healthy lives and relationships.
RULE #4 - GIVE YOURSELF (AND YOUR KIDS) SOME GRACE
Your son or daughter won't be Warren Buffett by age 5, nor should you expect them to be. When they're young, they'll blow some money on toys that don't last beyond 24 hours. They'll be reluctant to put money in the savings jar when they really want it to go in the spending jar. Generosity might not come as naturally as you'd like. As teenagers, they will, at some point, blow the money they needed for new shoes on a night out with friends.
This is what kids do. Don't panic.
Childhood is the time to make mistakes in a safe, nurturing environment. Use their mistakes as opportunities to teach. And always model the financial responsibility that you want them to practice.