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If you're relying on someone else to teach your kids about money or assuming they'll figure it out as they get older, don't. Taking the time to teach your kids about money and your values with respect to saving, spending, investing and using credit can help them establish positive financial habits they can use for a lifetime. Plus, it helps ensure they receive accurate information from someone they can trust instead of their peers or the latest social media influencer.
You may not be able to prevent every money mistake your child may make, but you can provide the foundation they need to manage their finances successfully when they no longer live under your roof. Here are 11 tips to help you get started.
Preschoolers and Early Elementary Schoolers
Think your kids are too young to learn about money? Think again. A 4-year-old may not understand the benefit of maxing out a retirement account and avoiding penalties when making withdrawals. However, they can understand simple concepts like using money to pay for something they want to buy at the store. Here are some ideas to help kids in this age group learn about money.
1. Talk About Money
Young kids don't need to know your annual salary or how much you paid for your house. But talking to your kids about money in an age-appropriate way teaches them that it's not a taboo subject and that it's OK to ask questions. Normalizing money conversations at a young age will help your child feel more comfortable coming to you instead of their peers when they're older and the stakes are higher.
2. Teach Them About Wants vs. Needs
Your kindergartener may want every toy they see on the shelves at the big box store, but that doesn't mean they need them. It's fine to want things, but kids need to understand they may not be able to have everything they want. Use real-life examples that demonstrate the difference between needs like nutritious food and water and wants like the latest video game. Teaching kids the difference lets them know that everyone must prioritize their spending, focusing first on necessities and second on nice-to-haves.
3. Give Them an Allowance
When kids are young, you're probably buying everything they need. But that doesn't mean you have to get them everything they want. If your budget allows, consider giving your child an allowance. Let them choose whether they save or spend it, and let them experience the consequences of their decisions. They will make mistakes, and that's OK. It's better for them to make mistakes they can learn from when they're young, and there's no impact on their long-term financial health.
4. Give Them a Piggy Bank
If you give your child an allowance, they need a place to keep it. Gift them with a piggy bank that keeps their money safe and allows them to watch it grow when they save and shrink when they spend. Having a visual representation to illustrate what happens when they save vs. spend can help young kids better understand how their habits affect the amount of money they have.
Mid-Elementary and Middle School
As your children get older and become more responsible, you can take some of the basic concepts you taught them when they were younger to the next level. Here are three ideas for upper elementary and middle schoolers.
5. Teach Them to Save
It's hard to wait, especially for kids. But waiting is an essential skill for maintaining financial health—and they should practice it early and often. Teaching kids to save up and wait for what they want helps them prioritize.
With limited resources, they're unlikely to be able to buy everything on their wish list. They have to choose what's most important. This also gives kids a chance to learn about opportunity cost. If they spend their money on X, they won't have enough to buy Y.
If your child is saving up for a large purchase, encourage them to stick with it. If they want to buy something else in the meantime, explain how it will affect their savings timeline. Teaching your kids to save up for what they want when they're young will (hopefully) make them think twice about overspending or pulling out their credit card every time they want something when they're older.
6. Create Opportunities for Your Kids to Earn Money
At this age, most children can't get a "real" job to buy things. As your kid gets older and their wants get more expensive, consider creating opportunities within your household for your children to earn more money. Creating paid jobs at home teaches kids that you must work to earn money. They get to choose whether they work or not. If they complete a job to your satisfaction, they get paid for it. If not, they don't earn any money.
Paid jobs work best for larger, one-off projects like cleaning out the garage, washing the cars or raking the leaves—not everyday activities necessary to keep the household running. After all, you don't want your seventh grader to say they're not taking out the trash because they don't need to earn any money this week.
7. Open a Bank Account
If you're giving your child opportunities to earn more money and teaching them to save, it may be a good time to open a bank account for them. You'll need to sign on as a joint account holder if your child is under 18. However, opening an account in their name allows them to track deposits and withdrawals and learn to balance their account while receiving your guidance.
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High School
When your kids enter high school, you can start teaching them about things they'll need to know to be successful when they move out on their own and for the rest of their lives. Here are four tips to help set them up for success as they go to college and start their careers.
8. Have Them Get a Job
High school kids are usually old enough to get a job outside of the house. You'll need to decide as a family whether your child will work during the school year or only during the summer and other breaks. When your teen gets their first paycheck, they may be surprised to see how much (or little) of their hard-earned money they get to keep. Take advantage of this opportunity to teach them about income tax and payroll taxes and how taxes affect their take-home pay. It's also a good opportunity to discuss other deductions they're likely to have withheld from their paycheck when they finish school, such as health insurance and retirement contributions.
9. Teach Them to Budget
When your child has a job and (somewhat) steady paycheck, you may want to shift some of the responsibility for purchasing necessities to them. Decide what you will pay for, how much you'll spend and what your child will be responsible for buying. Set expectations before your child starts their new job so there are no misunderstandings.
Once everyone understands the new expectations, help your child create a simple budget. Start with the must-haves first, then add discretionary spending. If your teen is saving for a large purchase like a car, create a separate line item in their budget for it. Helping your child budget teaches them to live within their means and prioritize what's most important. They may need to make some tough choices about how they spend their money and what they're willing to sacrifice to get what they want most.
10. Teach Them About Investing
As kids get older, saving money in a piggy bank won't be enough to achieve their long-term financial goals. The teenage years are a great time to teach them about investing and the power of compound interest. Show them examples of how their money can grow if they invest it for the long term. Don't forget to explain the risks associated with investing and how it's best for long-term financial goals like retirement, not for money they may need in the next few months or years.
11. Teach Your Child About Credit
Unless your child is 18 or older, they won't be able to get their own credit card or loan. But that doesn't mean you can't teach them about the importance of credit and how it can influence their ability to get a loan or credit card in the future, the interest rate they'll qualify for and how much they'll have to pay for home and auto insurance. Teach them how credit works, why it's important, what they can do to build credit and how to monitor their credit history.
You can add your child as an authorized user on your credit card account before they're 18 to give them an intro into how credit cards work. While they won't be responsible for making payments toward the statement balance, it's a good idea to have them send you money for their purchases so they understand credit isn't free money. You can show them your online account and explain the importance of paying your bill in full to avoid interest. When they start to build credit, they can check their free Experian credit report anytime.
The Bottom Line
Kids don't learn how to manage money responsibly by accident. They need to be taught. Responsible money management is a skill that takes time and practice. When you start teaching your kids about money early, they'll have the skills they need to make sound financial decisions throughout their lives. They may experience a few bumps along the way, but your guidance can help your kids avoid many common money mistakes many young adults make—like racking up high-interest debt and living beyond their means—and recover faster if they do have a misstep.