Teaching Children About Money – It’s Never Too Early to Start Learning Good Money Habits

I have long advocated having financial conversations with your kids. It’s important to give your kids an idea of how to appropriately manage money and talk to them about how you handle your finances and what you wish you had done differently.

However, it might be difficult to talk with kids about money. In fact, it remains one of the taboos of our society. Chances are that your children want you to talk to them about money and give them advice they can trust. The Millennial Money Study from Fidelity looks at some of the realities of kids and money and should provide some food for thought if you’ve been reluctant to talk to your kids about money.

Personal finance and related topics are subjects I don’t think our school systems focus on enough, which leaves financial education up to the parents or the child’s initiative.

Table of Contents

1. When Should You Have “the talk?”
2. Why You Should Be the One to Talk to Your Kids About Money
1. Your Kids Trust You For Financial Information
2. They Won’t Learn About Money in School
3. They Won’t Learn About Money in College
4. They Won’t Learn About Money on TV
5. The School of Hard Knocks is a Tough Neighborhood to Learn In
6. Learning About Money Takes Time – You Have at Least 18 Years
3. You Should Talk About Money More Frequently With Your Kids
4. How Can You Get Children Involved at Home?
1. Talk About Money in Your Home
2. At the Grocery Store
3. When Paying Bills
4. On Vacation
5. Help Your Child Make Money Decisions
6. Talk About Money Mistakes
7. Encourage Investing
5. Should Children Be Given an Allowance?
1. Why Kids Should Earn Their Allowance:
2. Why Kids Should Be Given Their Allowance: 
6. Money Lessons Children Need to Learn for Themselves
1. 1. You Don’t Always Get What You Want
2. 2. Save Up for What You Want
3. 3. Credit Cards are Loans
4. 4. Hard Work and/or Innovation Can Mean More Money
5. 5. You Don’t Have to Get Paid for Everything
7. How To Avoid Spoiling Your Kids
1. 1. Let your child feel disappointment
2. 2. Focus on the future rather than the right now
3. 3. Make children choose
4. 4. Help Children Understand Reality When it Comes to Money
5. 5. Limits are essential
8. Great Financial Gift Ideas For Children
1. Cash
2. Savings Bonds
3. Stocks & Other Equities
4. College Savings Account
9. Help Your Children Set up a Savings Account
10. How to Get Started
11. It’s Never Too Early to Start

When Should You Have “the talk?”

My daughter is too young to understand money, so we have been able to avoid having “the talk.” You know, when your little one asks you for the first time, “Daddy, where does money come from?”

An uncomfortable silence fills the air, and for a second, you think you can get away with changing the subject. But your child asks again, and you know you can’t stall forever.

OK, I’m joking, but money is an abstract concept that isn’t always easy for children (and some adults) to understand. I think the best way to teach children the concept of money is with hands-on experience starting at an early age.

Why You Should Be the One to Talk to Your Kids About Money

As parents, the education of our children is one of our most important goals. Education teaches children how to earn a living one day and how to get about in society. Unfortunately, money is one gaping learning hole in that education process. Very little of the time kids spend in school – at any level – will teach them how to deal with money. The bottom line is that if you don’t teach your kids about money, no one will.

Why is it so important for you to teach your kids about money?

Your Kids Trust You For Financial Information

The Fidelity study found that 33 percent of millennials identify their parents as the most trusted source of financial information. Additionally, 59 percent of millennials think their parents are good financial role models.

While that 33 percent number might not seem like a ringing endorsement, it still represents the highest rating. Millennials are more likely to trust their parents when it comes to money than they are to trust financial gurus and others. Indeed, the next highest trusted source for financial information is “no one,” at 23 percent.

It’s also telling that many millennials recognize their parents as good financial role models. Clearly, there is a chance that your children see what you are doing with your money and admire you for it. This means that you probably have more of an impact than you think. Your kids trust you to know what to do with money, so it makes sense that you should do what you can to help them make the best possible decisions with their finances.

They Won’t Learn About Money in School

Kids will spend 13 years in the school system, from kindergarten through high school. While they’ll learn all about higher-level math, poetry, protecting the environment, and high-minded scientific theories, by the time they finish, they probably won’t learn how to do something so much more fundamental, like balancing a checkbook.

Education purists may argue that the true purpose of school is to expose children to theories to stimulate their problem-solving skills. But, we generally count on the schools to do much more. Children are taught how to get along with others in appropriate ways (like bullying policies), their own reproductive capabilities (sex education), and even the importance of punctuality.

But conspicuous in its absence is financial education. Managing a bank account, understanding the importance of investing, compound earnings, the time value of money, the uses and implications of debt, and even asset allocation are all issues that will come up in every person’s life. Yet the amount of class time devoted to financial matters is painfully small if it even happens.

They Won’t Learn About Money in College

Unless Junior takes a personal finance course, he’s unlikely to get financial education in college either. This is despite an investment of four or more years and tens of thousands of dollars in tuition and fees. It’s hardly a surprise then that so many young people graduate from college deep in debt and often ascribe their situations to complete ignorance. Given the lack of education in personal finance, that seems to be a legitimate claim.

You would think that somewhere between kindergarten and undergrad, there would be at least some semi-regular course curriculum in personal finance. Alas, there isn’t. Your children won’t learn about money in elementary, middle school, high school, or college.

The moral of the story: don’t count on your kids learning about money at any level of the education system.

They Won’t Learn About Money on TV

According to the A.C. Nielsen Company, kids watch TV for an average of 3.5 hours per day. That’s roughly half the time they spend in school on a typical weekday. It amounts to about 24 hours per week, meaning that TV significantly influences what kids are learning – or not learning.

Unless the child spends much of his or her TV time watching financial programs, it’s very unlikely they learn anything about money from TV.

Or at least anything positive.

TV is probably a major negative influence where money is concerned. There are two undeniable impressions that kids are likely to get from TV:

1. Everybody is rich, or is at least highly likely always to have as much money as they need for whatever it is they want to do at that moment, and
2. Except for criminal activities, the whole process of earning a living is highly de-emphasized in the lives of people on TV.

None of that is conducive to a child learning anything constructive about money. And none of it will prepare a child to have a healthy view of money as an adult.

The School of Hard Knocks is a Tough Neighborhood to Learn In

One day, Junior will leave the family home and the familiar high school surroundings and go off on his own. Whether it is to live out on his own or to go away to live at college, he may be taking a look at his first serious experience in dealing with money on his own. But none of what he learned in either school or on TV will prepare him to manage his money intelligently. This is a major reason so many young people are in serious financial trouble early in life.

It’s probably true that the best way to learn about anything – including money – is through real-world experience. But those lessons can come at a heavy price. Accumulating six figures in unforgivable student loan debt, or being forced to file bankruptcy at age 25, are painful ways to learn how money matters can go wrong.

Learning About Money Takes Time – You Have at Least 18 Years

Parents must be extremely proactive in teaching them because their children will not learn about money anywhere they spend the most time (school and TV). It’s not an easy thing to do, but one advantage that you have is that you’ll have 18 years to do it.

Many parents try to shield their children from money issues, including household financial concerns. But that just leaves the child unprepared as an adult. Financial struggles are likely to touch your child’s life at some point, and any experience she gains as a child can only help her throughout her life.

You can teach your children about money using a variety of strategies:

• Give them a small allowance early in life. Let that be their absolute spending limit for non-essentials.
• Tie the allowance to chores. That way, the child will connect income to work. (Very important!)
• As your child gets older, certainly by middle school, have them pay certain expenses. For example, if your child has a cell phone, have her pay a couple of dollars per month for the service. This will help teach her that everything she has or uses must be paid for.
• Set up a savings account, and have the child put at least a little money in each month. The lesson will be learned as the account balance grows and the child sees it.
• If you have an investment account for your child, spend some time explaining and analyzing with your child as early in life as they seem ready to handle. And like a savings account, the lesson will be learned as the account balance grows. They’ll likely express an interest in the mechanics of the process from that point.
• If you’re saving up for a common family goal, such as a summer vacation, have the child contribute a little bit of money. That can expose the child to money’s all-important “we” component.

You Should Talk About Money More Frequently With Your Kids

Study after study shows that parents should talk with their kids about important subjects to impact them. This includes money topics. Unfortunately, according to Fidelity’s study, 49 percent of millennials say they haven’t received financial advice from their parents. This is a problem. Most kids aren’t going to get financial help from school curricula, so you must ensure that you are providing good advice.

You can start talking to your kids about money when they are young if you want to transition naturally to a situation where they can come to you for advice. Here are some tips to start talking about money more with your kids:

If you establish a rapport early on, and if your kids know they can come to you with money questions, they will be more likely to learn to manage money effectively and make better choices.

How Can You Get Children Involved at Home?

You can involve your children with money at almost any age. It can be as simple as explaining purchases when you are out and about. For example, you can make it a point to help when you check out at the grocery store or you pay for a meal at a restaurant. You can also involve children with money by giving them their own money to use for saving, spending, and giving.

Talk About Money in Your Home

You can have money discussions where your children can hear you. Discuss the pros and cons of different purchases, saving up for certain items, avoiding waste, and other good financial habits. Make it a point to ensure that money isn’t a taboo topic in your home.

At the Grocery Store

From weighing produce and determining what the cost will be, to keeping track of coupons, to comparing name vs. store brand, to keeping a running total throughout the trip, the grocery store provides you with a wonderful opportunity for your child to hone his math, money, and budgeting skills.

Making a game of the grocery store with younger children by challenging them to find a cheaper alternative or increase prices quickly will make financial education fun.

For older kids and teenagers, allowing them to take the list to see if they can spend less than budgeted (without sacrificing any of the needs on the list) will inspire them to be savvy shoppers—particularly if you let them keep the difference between what they spent and what you budgeted.

When Paying Bills

The monthly bill-paying chore is hardly anything you would call fun. But when kids are small and want to do everything Mom and Dad do, it’s an ideal time to teach children about money.

Allow children to see how much money you have and how much must go out to pay bills. Let them practice their addition and subtraction skills to help you balance your checkbook.

If you still pay bills by check, put the kids in charge of double-checking that you have all the necessary information in the envelope before they seal it, stamp it, and put it in the mailbox. Explain how the things your kids might take for granted—like heat and electricity and, of course, cable—cost money each month.

On Vacation

Even the most budget-averse family generally goes on vacation with only a certain amount of money they can spend. Involve your children in the decisions even before you’re debating between the hot dog vendor or the pizza parlor on the boardwalk.

Saving for a vacation is a fun way to teach children about the power of savings goals. If children understand that giving up something now leads to something wonderful later, they will learn the valuable tool of delayed gratification.

With only a certain amount to spend, including children in the planning process of your vacation will help them to learn how to budget and how to rank the importance of different options. Once you are enjoying yourselves on vacation, giving each child a certain amount to spend while away is an allowance lesson compressed into a week.

Help Your Child Make Money Decisions

Your child needs to make decisions with their allowance. One way is to help them comparison shop. You can look online for things your child wants, compare prices, and help your child look for the best bargains. You should also help your children understand the importance of setting aside money for the future and making smart spending choices now.

Talk About Money Mistakes

While it’s hard to talk about money mistakes with our children, it can be instructive. It’s a good idea to talk to your children about our past money mistakes. Additionally, you can make it a point to let your children make mistakes and talk about them afterward. If your child is determined on a course of action, let him go through with it, but when he has remorse later, discuss it with him and discuss alternatives that would have been better.

Encourage Investing

As your child ages, talk about investing, and help him or her make good decisions. Most children are focused on today’s wants and needs. So it’s important to help them understand the value of long-term planning.

Should Children Be Given an Allowance?

No one will dispute that giving children an allowance allows them to learn about money, saving, spending, and delayed gratification. However, there seems to be some disagreement on whether that allowance should be tied to chores—and therefore earned—or if it is simply given each week. Here are the pros and cons of each side of the allowance debate.

Why Kids Should Earn Their Allowance:

If the point of allowances is to teach children about money, then the most obvious reason to make allowances chore-dependent is so that your kids learn that money isn’t free. It’s very easy to imagine that children who do not have to work for their allowances will grow up feeling entitled. In addition, by tying money to chores around the house, children will learn that they can earn more money for more work—a great lesson.

A further positive aspect of the allowance for chores rule is that it can also help children to learn how to become more competent in a job—and to learn that they can ask for raises if they are doing a better job than they used to. Learning these difficult lessons at home will make your child more confident in his first job, and throughout his career.

Why Kids Should Be Given Their Allowance: 

On the other hand, there are several issues with tying money to household chores. The first is the inflation of rewards for things your children should already be doing. Being part of a family means doing chores for the good of the family, not because there is a financial reward.

In addition, many children are simply unmotivated by those sorts of rewards. For these kids, no amount of money is worth the ability to ignore tasks. So tying money to chores also ties your hands when disciplining children for not pitching in.

Finally, appointing yourself as your children’s boss can be tough for parents who aren’t naturally organized. If you pay Junior and Sis for different tasks, will you remember who did what and when? Many parents end up instituting a chart system to keep track of the chore schedule and payment—but if this is not your cup of tea, you may teach your kids that lying about work is a good way to earn money.

Money Lessons Children Need to Learn for Themselves

As you consider what to teach your child, here are five important money lessons your kids should learn:

1. You Don’t Always Get What You Want

Giving your child everything he or she wants may seem like a loving thing, but it’s unrealistic. We don’t always get what we want. As adults, we know that sometimes it’s impossible to get what we want immediately. Sometimes we have to wait for what we want, and sometimes we just don’t get what we want, period.

So why do we let our children have whatever they want? Say no to your kids sometimes. Let them know that sometimes they just aren’t going to get that new whatever-it-is. This can be a good way to help them be content with what they already have.

2. Save Up for What You Want

Even if you can’t have something you want now, it’s often possible to get it later — if you save up. One thing you can do is teach your child the value of saving money. Encourage your child to save up for what he or she wants, and make it a pleasant experience. This can be a great way to help your child develop a habit of saving money throughout his or her life. Being able to save up, and pay with money already in hand, can be a source of pride, and you need to encourage that.

3. Credit Cards are Loans

Too often think of credit cards as representing “our” money. It’s easy for kids to think this way, too. However, a credit limit of $3,000 doesn’t mean you “have” $3,000. It means that you can borrow up to $3,000. This is a lesson vital to the financial well-being of your children. Credit cards are loans. If you carry a balance, you are paying interest. Make sure that your kids understand how credit cards work and that they realize that the money isn’t “theirs.”

4. Hard Work and/or Innovation Can Mean More Money

Don’t forget to teach your children the value of hard work and/or innovation. Whether your child is working harder or smarter (or both), he or she needs to understand the value of earning money. They must be given chances to earn money while young and learn to like the feeling of working for what they receive.

5. You Don’t Have to Get Paid for Everything

Finally, I think it’s important that children learn that money isn’t the be-all and end-all — and that it isn’t the only measure of what something or someone is “worth.”

We do some things in life because they are the right things to do and not because we’re being paid. Service and charity should be encouraged.

One of the reasons we don’t pay our son for doing basic chores like keeping his room clean, setting the table, gathering the trash, and dusting is that we want him to learn that sometimes we do things as part of a family. We don’t need to be paid for everything we do and for every service we render. This is a great money lesson as well.

How To Avoid Spoiling Your Kids

No one plans to raise a child like Veruca Salt. The spoiled brat in the story Charlie and Chocolate Factory was given her every heart’s desire by her loving and over-indulgent parents—and became a gimme-gimme monster who ends up being pushed down a trash chute when she won’t take no for an answer.

Obviously, this fictional child is far worse than any real case of entitlement, but Roald Dahl had some pretty sharp observations about what makes a kid spoiled: poor decisions from her parents.

The thing is, Veruca’s parents truly loved her. Mr. Salt went diving right after her when she tumbled down the trash chute. Loving your kids is not the issue when spoiling them—it’s about the decisions and habits you make every day.

Here are three things you can do every day to make sure your child does not end up like Veruca:

1. Let your child feel disappointment

Life doesn’t always go your (or your child’s) way, and that’s as it should be. Parents often want to shield their children from harm, but learning that disappointment, pain, and heartbreak are all temporary helps to build resilient kids (and adults). Your little one doesn’t understand yet that she’ll survive if she never gets that American Girl doll she wants. But giving everything to her will make her fear that she can’t handle disappointment because she’s never felt it.

One simple way to put this in practice is to let your household run out of favorite groceries once or twice a month. If your milk-loving son realizes that the moo juice doesn’t magically appear in the fridge at his whim, he’ll better understand that he’s not entitled to everything he wants.

2. Focus on the future rather than the right now

One of the reasons why kids become spoiled is because it is so much easier to hand over whatever they’re screaming for rather than deal with the tantrum. While it may make this particular trip to the grocery easier, it won’t make raising your child easier overall. You need to recognize that your limits now are an investment in the future.

It’s the same way you encourage your child to save some of their allowance or gift money for the future. If they immediately spend every cent they get, they will never learn how to resist instant gratification.

3. Make children choose

Kids as young as two years old can handle making choices between two options. Older kids can handle even more choices. Asking your child to decide whether he wants an English muffin or a bagel for breakfast gets him used to having a sense of control over his environment and life. This also helps him to develop self-regulation: when a child feels he has some choice, he won’t feel the need to break the rules.

In addition, having kids live with their choices helps them understand that resources are limited and their choices have consequences. For instance, if they don’t like the cereal they picked out at the grocery store, you can tell them that they still have to finish the box before buying more.

4. Help Children Understand Reality When it Comes to Money

A recent survey by Charles Schwab found that teenage boys expected to earn an average of $174,000 and girls expected to earn $114,200. These are very high salaries and are much higher than most people will ever earn in a year!

This is even more unrealistic when considering American adults’ median earnings. From the article:

Median earnings of men who worked full time, year round in 2005, the latest year for which Census Bureau statistics are available, was $41,386.

Women working full time made a median of $31,858.

Fewer than 5% of the U.S. population makes more than $100,000, according to the bureau. Only one household out of six report a six-figure income, according to the Federal Reserve’s 2004 Survey of Consumer Finances.

The top 3 career choices among the polled teens were in the medical, technology, and teaching fields. It is reasonable for some medical and technological professionals to earn six figures. Still, it is rare for teachers to earn six figures unless they become tenured professors or go into administration.

5. Limits are essential

When it comes to entitlement, the problem is not really about money—it’s about a lack of limits. Setting reasonable limits on children from the beginning and making it clear that wanting something is not reason enough to get it will go a long way to help avoid spoiling your kids and keeping them grounded.

After all, you’d hate for them to turn out like Veruca.

Great Financial Gift Ideas For Children

One of the best ways to teach children is to get them involved in managing their own money. Here are some ways you can give financial gifts to children that will help them in the future.

Granted, the younger the child, the less likely he or she will understand what you are trying to do here, but there are ample gift-giving ideas that fall into the financial category, and they all have good value.

Cash

The first and most obvious gift you can give is cold hard cash. When I had cash as a kid, the world looked different. Possibilities were endless, and I was pretty sure I could have purchased any country I wanted for only $20.

The problem with giving cash as a gift is that it doesn’t do anything to teach children about being responsible with their money. The cash wasn’t earned, so its value isn’t much. While you are certain to be hugged and praised for quite some time, you can do better.

Savings Bonds

A step up from cash savings bonds can be absolute torture to a young kid. Having something so close to cash, yet being years away from being able to spend it, is a great way to teach patience. (And a great way to be hated as well!)

Currently, you have two main choices for bonds, the EE and I. Double E-Bonds mature to the value printed on the certificate, whereas the I-Bonds mature to a value greater than that on the certificate.

I mistakenly assumed I was given twice as much money because I always received EE bonds. Savings bonds are a good way to teach kids patience, which is a valuable financial lesson.

Stocks & Other Equities

Getting a little more complicated now, stocks are a risky pick for a kid’s gift. There’s no guarantee that the stock will be around long enough for the child to take advantage of the monetary gain, so giving a stock needs to be more about handing over a certificate (Although stock certificates are pretty cool if you ask me).

Sit down and explain exactly what a stock is, how it works and how if they want to, they can add to the value of the stock over time. Try and get them to follow the company they are now invested in, and hopefully, you will find them, one day, watching CNN on their own time.

College Savings Account

A Coverdell Account is, in essence, a college fund for students to use for anything relating to the school’s expenses. Anyone can contribute to a student’s account, and as long as the child is under 17, they can be signed up for a Coverdell Account.

The immediate benefit is that the withdrawals are tax-free as long as they are used for educational purposes. However, the contributions are not tax-deductible. If the student does not pursue a college education, the funds are assumed as income and are subject to regular income taxes.

A 529 College Savings Plan is another way you can help a child save for college. You can compare the two accounts here: Coverdell ESAs compared to 529 Savings Plans.

Help Your Children Set up a Savings Account

Giving your child a real-world experience with money can help them make smart financial decisions in the future. For starters, open a savings account online for your child. Compared to brick-and-mortar banks, online savings accounts have:

• Higher interest rates
• No minimums to open or maintain an account
• No fees, penalties, or service charges
• Access to the account 24/7
• (currently $250,000), similar to brick-and-mortar banks

However, if you prefer an in-person experience, local credit unions offer similar benefits. They may have higher interest rates, low minimums, and no fees compared to most brick-and-mortar banks. In addition, credit unions are NCUA insured (similar to FDIC, but specifically for credit unions) up to the same federal limit as banks. Still, there are several differences to bear in mind. Access to the account may be limited either by time or location. Use the NCUA search tool to find a local credit union for more specific information.

Through their online savings account, your child can see how their money grows based on their actions. Money deposited to the account can stem from a variety of sources, including:

• Money from family members for birthdays and holidays
• Allowance for completing weekly chores
• Entrepreneurship opportunities, such as opening a lemonade stand or selling their old toys and clothes at a rummage sale

A key ingredient in teaching your kids the value of money is to allow them the freedom to withdraw or deposit their funds at any time (most online savings accounts allow a maximum of 6 withdrawals without a fee per month). Teach them that this is their money to maintain. Once the money is taken out, it’s gone. In addition, they can never take out more money than they have in the account. If your kid wants to purchase items that are not within your budget, grant them permission to purchase the item…using money from their account. If they don’t have enough, they must come up with the funds to pay for it.

Finally, go over each month’s statement with them. Each month, point out the amount they started with and the interest they had accrued. Demonstrate the relationship between the amount of money in the account and the amount of interest they receive. The more money in the account, the more interest they’ll accrue. In essence, you’re teaching them the power of compound interest, a lesson they will appreciate later on in life.

The purpose of the online savings account is to teach your child the value of money and not necessarily to help them save money for their future (though this is a potential by-product). Saving money is hard work and takes time. Having to save money for a long time to have the funds to buy what is desired requires your child to evaluate purchases more closely. It also teaches them delayed gratification. An Xbox 360 is much more meaningful to a child if it requires saving money for a year before the purchase.

How to Get Started

Here are some more money management tips for children:

• Set an allowance.
• Have them use their own money for purchases.
• Teach them about saving and giving.
• Open a savings account in their name.
• Start an investment account in their name and teach them to track investments.
• Offer to match their savings contributions.

Tip: Make learning fun. You can turn learning about money into games or use a board game such as Monopoly or Life. You can also use online games or tools.

It’s Never Too Early to Start

As you can see, I was joking about teaching my daughter about money – she is way too young. But I am already setting the foundation and starting her on a strong financial path.

Shortly after she was born, my wife and I opened a savings account and college savings plan for her. The goal is to make automatic contributions so that, over time, she will have a substantial amount of money saved for her college tuition and, hopefully, have a decent amount of money in savings.

A couple of notes about opening joint savings accounts: You can easily set up multiple savings accounts with most online banks, and some of them, including Capital One 360 and Ally Bank, feature the ability to create sub-accounts, which is an easy way to create accounts within an account for targeted savings.

Editor’s Note: Emily Guy Birken, Kevin Mercadante, and Miranda Marquit contributed to this article.

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