How to Teach Kids About Money

Most parents know the importance of teaching their kids about money.

That’s because being able to manage money is a universal life skill adults need in order to survive in this world.

The real questions start when faced with how to go about teaching money management in an almost-cashless society, and with many adults having never received a formal money education themselves. Rest assured that raising money-smart kids is not a complicated process.

The most difficult part? Is just getting started.

How early do you start teaching kids about how money works?

Many parents want to know how early they should start teaching their kids about money.

The answer is actually much earlier than you might have thought.

It turns out that kids can start understanding basic money concepts as young as the age of 3.

In fact, my own child actually completed a store transaction at the age of two.

I didn’t plan for it – we were just out and about and I remembered we had a free gift card earned from a summer reading program for a free ice-cream or a free order of French fries. I talked him through the transaction ahead of time, and then let him stand in front of me and order from the person himself, including “paying” with his card.

He was able to grasp that the gift card he handed the cashier was being exchanged to get what he wanted (he chose the ice-cream cone).

Technically, that was the start of his money education!

Kids get it

Not only can kids grasp basic money concepts pretty early on, but there’s another reason to start their education early.

It turns out that by the age of 7, your child has actually cemented in place some of their money habits having to do with the ability to plan (save money) and being able to delay gratification (spending vs. saving).

This means that if you can work with them ahead of that time to positively influence their money behaviors, then they might end up ahead of the pack.

And if you just read those ages and started to panic because your child is a tween or teen and has had no formal money education up to this point? Now’s the time to take a deep breath because you’re not alone. T. Rowe Price’s 2018 Parents, Kids & Money Survey revealed that 30% of parents wait until their child is 15 years of age or older to start having financial conversations with them.

The one thing to remember is that some money education is always better than none.

Whether you’re starting as early as you’d like or not, keep reading to learn how to dive right in.

How to start teaching kids about money

It’s human nature – for both kids and adults – to be much more open to learning about a topic when you have a personal stake in it.

Because of this, the best way to start teaching kids about money is to help them choose something that they want to buy (in the be-do-have category).

It takes the big concept of money down to your child’s level. Not only that, but it gives you a reference point for those money conversations and lessons you want to give them.

For example, let’s say your child chooses horse-riding lessons at a cost of $65.

This is a great money goal to spring conversations about goods and services costing money, about how people earn money to get what they want, about needs versus wants, and all sorts of other important money concepts/skills you want your child to learn.

To start this process, you first want to help your child brainstorm all the things they want to buy. This list might be quite long (or short, if they can’t figure anything out).

You want to talk them through all of their wants, and then let them know that each of these things or experiences will cost money.

Then, you want to help them narrow their list to just one money goal for now.

Finally, you want to help them price their money goal so that they know what their target savings amount is.

Each of your money interactions with your child can be filtered through the lens of their savings goal, such as when they want to make a random purchase at the candy aisle. “Wasted” money actually becomes an easy way to educate your child when they have a savings goal because instead of telling them “no” right off the bat, you can simply ask them if they’d like to buy that with their money, or save the money to get closer to buying their savings goal.

Other ways to build a money education around a kid’s money goal include:

  • Having a priorities conversation: Talk to them about priorities, and how needs have a higher priority than wants. Then ask them whether what they want is a need or a want.
  • Calculating the true cost of their goal: Help show them how to calculate out how many allowance cycles it will take for them to save up for their goal. Then ask them whether or not they still think what they want to buy is worth it.
  • Discussing discount options: Talk to them about different ways to decrease the amount it will cost to buy what they want, such as using a coupon, shopping on certain “sale” days, or buying it out of season.

Once your child has a money goal of their own – which means they’re all ears when you teach them the sound money behaviors they need to know to get what they want – you’ll want to make sure your child actually gets cash into their hands to buy it.

This happens to be another important but often missed point when discussing how to teach kids about money.

How do you teach kids about money when they never see cash?

You have to ask yourself whether or not as a pre-tween, tween, or even teenager, you would have understood how money works without ever touching cash.

The answer, of course, is “no.”

Not only is it too difficult for your child to learn how to manage and budget money without ever touching the stuff, but it will make them less confident handling money Not to mention, it could cause more thoughtless spending.

That’s why it’s ultra-important that you get actual cash into your child’s hands when you’re teaching them about money.

It’s up to you which kid money system you’d like to use – whether you want your kids to earn cash through chore commissions, an allowance, or an outside job – but the point is that your kids will have to handle money in order to make mistakes and learn how to better manage it as they go.

If you’re a family that simply does not use cash, then I’ve got a few suggestions for how to make this work:

  • Give them cash for budgeting something big: Let your kid plan a specific event, with a set budget. Hand them this budget in cash, and have them work through how they’ll spend the money and actually make the transactions with your help.
  • Talk out your transactions: If kids only ever see you make purchases with plastic (debit or credit), then they won’t fully understand how money really works. You can still pay with plastic, but talk them through some of your purchases. Things like telling them how you earned the money, where the money is located, and how much this will cost will all help take the myth out of plastic being like a magic well of money.
  • Hit up the ATM once a month: To make giving a cash allowance or paying cash for chore commissions more convenient, you can total up a months’ worth for each of your kids and hit up the ATM just once each month. Divvy out the money as the month goes on.

Remember that your child eventually needs to learn how to use plastic, the difference between a debit card and a credit card, online banking, and things like that.

But it’s important that you establish their money education foundation in actual cash, and build from there.

Helping your child develop healthy spending habits

Your child needs to make their own money decisions in order to self-discover some of the money skills they need for adulthood.

But there are ways that you, as a parent, can direct their money training to help them develop healthy spending habits.

For starters, you can have frequent money conversations with them. These are not conversations where you dictate how they spend money or name off all the money mistakes they’ve made that have disappointed you. Rather, you want to be open to their questions, give them examples of money mistakes from your own life and how you overcame them, and help talk them through their own decisions.

In the beginning, you’ll be more of a co-money manager with your child. But understand that as your child ages, you want to become more of a money mentor to them.

Next, you can help your child create a spending plan for their allowances. This will give them plenty of practice in budgeting their money from week-to-week, or month-to-month. At the end of the period, you’ll also want to ask them how things turned out versus how they had planned to spend their money.

Self-analysis is a great spending habit for a child to take into adulthood!

A final way to help your child develop those healthy spending habits is by modeling good spending behavior to them. Show them how you budget your own money, and how not all of your paycheck goes towards spending each month. Let them know of purchases you’ve made that were a great idea, and those that weren’t so hot.

How do you teach kids to save money?

While one of the first things kids will do with money – besides learning how to count it – is to spend it, the next thing they’ll need to learn how to do is to save it.

Saving money for most of us is a learned skill. It involves delaying gratification, and that is a muscle that needs to be exercised.

So, don’t set your expectations too high!

In the beginning, saving money could look like your child ending one allowance week and still have a few bucks leftover. You could simply point out to them that they had “saved” whatever amount it is that they have leftover to go into the next week.

Then, you can help your child get a bit more intentional with saving money by helping them come up with a savings goal that will take more than one allowance cycle or chore commission cycle to purchase.

As they get savvier with their money, they can create spending plans that include a percentage of their money intentionally being leftover for savings – whether that savings goes into a mason jar, a piggy bank, or the actual bank.

Speaking of spending plans, let’s discuss how to teach your child to budget.

What is a good starting point for teaching your children about budgeting?

Sitting down to help your child create a spending plan for their allowances/chore commissions/paydays is an excellent starting point for teaching them how to budget.

It helps them to see the whole picture – how much their total payday will be for – and how their individual purchases fit into it. Then, as they go through their everyday transactions, they can record purchases to see how their actual purchases are stacking up against their planned spending.

Another great way to help your child learn to budget is to talk about the budget of your own household.

However, you might not be too excited about sharing your household’s stats for any number of reasons. No problem – you can simply use percentages.

List out of your household’s spending categories, like rent, food, gas, clothes, entertainment, debt bills, etc. Be sure to include things like savings (long-term and short-term), as well as retirement investments. Ahead of time, figure out what percentage of your paycheck goes to each of these categories (use one example month for simplicity), and then share that with your child.

At the end of the day, we want the best for our children. And we know that teaching them to smartly manage their money will put them in the best possible position to survive as young adults, on their own. By taking the time to use some of the strategies above, your child will begin to build healthy money habits no matter what age you start.

–By Amanda L. Grossman

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