Mom of 3 and author of “Hard Core Poor” shares some simple tips on how to teach children about money, management and financial responsibility.
I’ll be honest – I have a 13 year old, a 10 year old, and a 2 year old, and I was shocked to realize how much I had forgotten between the time I taught my 10 year old when he was a 2 year old, and now.
That’s something they don’t tell you about parenting – after a while all the details start to blend together. So I asked my two older kids what they remember about me teaching them about money.
I got a few blank stares. Finally they came up with “save money instead of spend it, and don’t pay full price.” And “I remember learning to count coins with you.”
I suddenly realized that they had internalized my money habits to such an extent that they didn’t realize they had been learning how to manage money all along! My daughter has been bugging me for a new outfit, and said “Mom, can we please go to the thrift store this Wednesday? It’s half price day, and I want to look for some shorts.” That’s right, my kids wait until half price day even at the thrift store!
Actually, I do spend quite a lot of time talking to my children about money – what it is, how to use it, and how to earn, save and spend it. (They have the spending part down. Oh well.) My husband and I include the kids in discussions about money, spending, purchases, and how we manage our savings and debt payments.
As a parent, I have no delusions that my children will be able to avoid all money mistakes as they grow older – after all, mistakes are the most effective teacher. Do you remember the first time you bounced a check? The horrified realization that not only do you NOT have money, but the bank charged you MORE money for not having enough money? Nothing I could come up with as a lesson will drive home a lesson in responsibility as much as allowing them to make mistakes, so I give them the liberty to manage a certain amount of their own money. If they make a foolish purchase at the street fair and run out of money when they want something at Target, that teaches them to manage their money better.
The hard part is not “rescuing” them – as their mom, I want to give them the things and experiences they want, and it can be hard to watch them struggle when I know I have another $5 in my pocket. But if I bail them out, they don’t learn how to manage their money – they learn that Mom and Dad are a resource. That’s OK while they’re little, but when they’re 30, you don’t want them thinking “Eh, I spent my rent money going to a concert, but that’s cool – Mom and Dad are good for some cash!”
Watching parents use money can seem very abstract for kids, especially since most of us don’t carry cash anymore. Kids see their parents buy things with the swipe of a magic card, and it can be hard for them to understand that every swipe moves money from your account to the store’s account. That’s why it’s so important to start talking to your kid about money as soon as they can understand that coins don’t go in the mouth.
We set up savings accounts for each child as soon as we were able. As babies, about 60% – 75% of all birthday and Christmas money from relatives gets deposited, with the remaining money used for cute toys and clothes. As the kids get older, we deposit half their money, while the other half is theirs to use as they please. They get a kick out of seeing their balance climb with each deposit, and we remind them each time that that money will go toward their first car, so they can pay cash and not have a payment!
Start by letting them play with coins and dollar bills, and introduce them to toy cash registers. My favorite is the classic Learning Resources one. Play games with them selling and buying their toys, using whatever coins they have started to recognize. The idea here is not just to get them to understand how to count and add up totals, but that money is exchanged for things.
Kindergarten And First Grade
Start working with your child, teaching them the value of each coin – 5 pennies equals one nickel, 10 pennies equals a dime, and so on. It’s a little easier for kids to add and subtract nickels and dimes than quarters, at least at first, but teach them about quarters too. Let them buy little things at the store now and then – give them a dollar, and help them figure out if they have enough to buy what they want with that dollar. (If you live in an expensive area, try this with a five dollar bill.) As they master this skill, teach them how to count out the coins to pay for the item (this can take until age 8 to master).
If they don’t have enough for the item they want, RESIST the urge to help them make up the difference! Instead, help them find an alternative item that costs less, or mention that they could keep their dollar until next time, when you will give them another dollar to shop with. This isn’t about providing for your child – they won’t suffer without the gum or plastic toy, I promise. This teaches them that if they don’t have enough money, they can’t get what they want without saving. A little bit of frustration is OK, but if your child is still throwing huge fits about not being able to buy a $10 toy when you told them their budget is a dollar, you may have to put this exercise off until your child has matured a little.
Video: How To Teach Children Good Money Habits
Second To Fifth Grades
If it isn’t your habit to go grocery shopping with cash, make an exception and withdraw the cash before you go to the store. Hand your child a pencil and paper, and teach them how to round the amount of each item to the nearest dollar, and add them up as you put the groceries in the cart. When you get to the register, they can see how close their estimate came to the real total, and how much of the cash it will take to feed the family for a week. As a bonus skill, teach them how to count back the change so they’ll know if the cashier gave you the right amount.
Explain as you shop “the reason we buy the Toasty-O’s instead of Cheerios is it costs $1.50 more for Cheerios, and you like the Toasty-O’s just as much”. “We choose to buy hamburger meat and buns instead of eating at McDonalds, because I can make more burgers for the same amount of money, and they’ll be healthier.” And “when we save on groceries, we can use that money for something else, like saving up for a vacation.”
This is a good age to help them learn that money comes from work, too. You can pay them to do a special chore, give a set allowance in exchange for certain tasks, or you can encourage entrepreneurship by teaching them how to set up lemonade stands or run a yard sale. My own kids gathered up interesting looking rocks from our yard, set them up on a table, wrote a jingle(!), and sold rocks to passers-by. And people BOUGHT them! My daughter also got a high quality set of face paints, downloaded some face painting tutorials, ordered some business cards (with my blessing) and now has a business working kids parties!
If your kids are crafty, see if they would like to make more of those milk carton bird feeders to sell, or pinecone bird feeders. Help them set the price, based on how long it took them to make the item, and the cost of the materials.
Middle School Years
As well as continuing all the previous exercises (because practice makes perfect), now is the time to talk to your kids about interest. Many people have their first real experience with interest when they have to pay it, like with a credit card or car payment. As a result, some people never learn how to make interest work for them.
It’s true that interest rates are low right now, which means it’s hard to find a savings account that will pay more than .1% interest, but interest is not limited to savings accounts. Ask your local bank or credit union about Money Market accounts (MMA) and Certificates of Deposit (CD) – both offer a better interest rate than the average savings or interest checking account, but usually have a minimum dollar amount to open and maintain the account.
In our case, we had a small early inheritance come through, so we set up the longest term CDs we could for each kid. You can set up CDs for terms of anywhere between 3 months to 60 months, with the longer terms paying better interest rates. CDs can seem a little boring to kids (and some adults!) but if you show them that the money makes more money just by sitting there, it might perk their interest a bit. These are the safest investments out there – as your kid learns more, you can start introducing them to individual stocks and mutual funds.
High School Years
Your baby is old enough to get a job of their very own! I’m sure their financial goals lean more toward iPods, fancy clothes and a car, but you want them to have money saved for college. What works for a lot of teens is to split up their check by percentage – say 50% into savings, 30% for fun, 10% for investments, and 10% for charities. Obviously these are just example numbers – I know of one family that insists that their teen deposit 80% of their check into savings, 10% for needs and wants, and 10% for charity. It’s all about what works for you and your family – just pick an amount and stick with it.
It may seem strange to suggest retirement funds when your teen can’t even vote yet, but I would suggest that they set up an IRA account and contribute ten percent of their check to that fund while they’re living at home. Even if they only contribute until they move out on their own, and don’t deposit in it again until they’re 30, they’ll have a major leg up.
According to Forbes:
A single $1,000 IRA contribution made at age 10, for example, could grow to $11,467 over 50 years, assuming a conservative 5% average annual growth rate. Contribute $50 each month, and the account might grow to $137,076 (with the initial $1,000 contribution and the same hypothetical growth rate of 5%). Or double the contribution to $100 each month and the account could reach $262,685.
Seeing those numbers, I wish I had done that when I was waiting tables and dancing around in candy bar costumes in high school!
A car is the ultimate symbol of teen independence, and I remember many of my classmates being thrilled to get their first drivers license. But do they really need their own car right away? And on average, the risk of being involved in a car accident the highest for drivers aged 16- to 19-year-olds than it is for any other age group. Some parents hear that information and immediately want to buy their teen a brand new financed car with the highest safety rating and immediately replace it after the first accident. I understand wanting your teen to be safe, but when your teen hasn’t had to contribute to the purchase of a vehicle, they’re less likely to treat it with care. If your teen rides their bike or takes the bus to work for a few months, they can save up for a reliable used car with a good safety rating (Volvos are super) – and you can help them pick it out.
Just remember, learning about money is a lifelong process. Don’t panic if your ten year old isn’t disciplined enough to save their money yet – it’s a skill that you can help them develop. As a parent of 3 kids, I’m still learning about money management, and my guess is you are too. It’s OK to tell your kids that you’re learning along with them! Help them manage their money now, and one day maybe they can give you advice on your retirement fund.
Written in a warm, accessible voice, The Opposite of Spoiled is an inspiring read for parents who want to raise modest, patient and grounded children who will be financially wise beyond their years.
Combined with real-world stories from families with a range of incomes, the foundation of the book is a detailed blueprint for the best ways to handle the basics: the tooth fairy, allowance, chores, charity, saving, birthdays, holidays, cell phones, checking accounts, clothing, cars, part-time jobs, and college tuition.