How to Teach Kids About Money

Preschoolers and Early Elementary Schoolers

Think your kids are too young to learn about money? Think again. A 5-year-old may not understand the benefit of maxing out a retirement account, but they can understand simple concepts like using money to buy something they want 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 the subject isn't off-limits and it's OK to ask questions.

Normalizing money conversations when they're young 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. Wanting things is normal, but kids need to understand they may not be able to have everything they want.

Use real-life examples to show your kids the difference between needs like water and nutritious food versus wants like the latest video game. It's an important lesson that lets children know everyone (even adults) must prioritize their spending, focusing first on necessities and second on nice-to-haves.

3. Give Them an Allowance

When kids are young, you probably buy 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 allow them to experience the consequences of their decisions.

They'll make mistakes, and that's OK. It's better for them to learn from their mistakes when they're young and their choices won't impact their long-term financial health.

Tip: If you're concerned about your young child keeping track of physical money, consider giving the allowance in play money that they can then cash in for real currency when they want to purchase something.

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 that illustrates what happens when they save versus spend can help young kids better understand how their choices affect the amount of money they have.

5. Teach Them the Importance of Giving

Kids learn by watching their parents. Model giving back, and talk to your children about why you do it and why it's important.

Encourage them to donate toys they no longer play with, but don't force it. It can be tough for kids to part with their belongings even if they haven't touched them in six months.

When they're ready, consider having your child set aside a portion of their allowance (it doesn't have to be much) for charitable contributions.

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.

6. Teach Them to Save

It's hard for kids to wait for what they want. But waiting is an essential skill for maintaining financial health—and they should practice it early and often. Teaching kids to save for what they want allows them to set financial goals, prioritize what's most important and learn about opportunity cost.

Example: If they have $100 and buy a ticket to go to a concert with their friends, they may not have enough left over to get a pair of designer jeans to wear to the concert.

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 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.

7. Create Opportunities for Your Kids to Earn Money

At this age, most children can't get a "real" job to earn money. As your kids get older and their wants get more expensive, consider creating opportunities within your household for your children to earn. Creating paid jobs at home links working to earning money.

Your kids get to choose whether they complete a specific job. If they do, they get paid. If not, they don't. This allows them to control how much (or little) they earn.

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.

Tip: Create a chart of the paid jobs available, and assign each a dollar amount. Cleaning out the garage could be worth $25 since it's a larger job that doesn't need to be done as often, but washing an extra load of laundry could be $2 because it's a more frequent task.

8. Open a Bank Account

If you're giving your child opportunities to earn 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. Opening an account in their name allows them to track deposits and withdrawals and learn to balance their account while receiving your guidance.

High School

When your kids enter high school, you can start teaching them about things they need to know to be successful when they move out on their own. Here are five tips to help set them up for success as they go to college and start their careers.

9. 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.

10. 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.

11. Show Them How to Create an Emergency Fund

High school kids are planning for the future when more of the financial burden will fall on their shoulders. As your children move toward financial independence, it's essential for them to understand that life doesn't always go according to plan.

Having an adequate emergency fund can help them avoid high-interest debt and protect their financial health when the unexpected happens. Many experts recommend setting aside three to six months of living expenses.

It can take time to build that much of a financial cushion. Encourage your children to set aside a specific dollar amount from each paycheck until they have a fully funded emergency fund.

Be aware:If your child is planning to apply for financial aid for college, you may want to limit how much they save in an emergency fund under their name. Having a hefty bank account, even if it's earmarked for emergencies, could work against your child when qualifying for financial aid.

12. 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.

If your teen has a job and earns taxable income (babysitting and doing odd jobs for the neighbors don't count), consider opening and contributing to a custodial individual retirement account (IRA) to get a headstart on investing. They can contribute up to the annual maximum allowed by the IRS or their total taxable compensation, whichever is less.

13. 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, how it works, why it's important, what they can do to build credit and how to monitor their credit history. Let them know how it can affect 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.

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.

If your credit card issuer reports payments on authorized user accounts (not all do) to the three consumer credit bureaus (Experian, TransUnion and Equifax), have them check their free Experian credit report anytime to see how it affects their credit history.

Frequently Asked Questions

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 young adults often make—like racking up high-interest debt and living beyond their means—and recover faster if they do have a misstep.