Mathematics, science, and reading are subjects which take years to learn and develop. Why should money and finances be any different? The schools aren’t teaching it, and you can definitely teach it better. In this post we will show a guide to teach your children about money.
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3-6 years old
Yes it starts this early. Now, you definitely should not have a sit down and talk about the stock market, that is for another time.
Just go with the basics. Let them know about money and work. They should know how you and everyone have to work to get the things you need and want. Taking them to the store is a good way to help them see how money is transacted. You do not need to describe the details, just let them know that money is valuable. I have heard of people playing games at home with their children to teach them how to shop.
Most Of What Your Child Learns Is Indirect
However, most of what you teach your child about money will be indirect. How you handle money and how you talk about work and money will sink into your child and can easily be reflected in the future. I know many people want to spend more time with their child, but whatever you do, do not tell them you “wish I did not have to work, but I have to so we can have this home” or anything like that. People say this to their children all the time and wonder why when their kids grow up they end up hating money and work. Who would want to work if their parents told them that the reason they cannot spend time with them throughout their life is because of work?
Improve Your Own Attitude With Money
Also make sure that you at least try to establish a better relationship with your money, try to create a positive aura about money. Even having a good handle on money will lower your stress.
If you have investments (and you should) do not show very high negativity towards them. You can show that you are upset, but do not yell or show any high stress about your assets around your child.
Now this may be jumping ahead a bit, but if your child is interested in what you are investing in, tell them about it and be honest. I do not see anything wrong about telling your little one about assets and why you invest in them. However, you do not need to explain assets to them at this age. Do try to make it simple. It is sufficient enough to tell them that you buy assets to get more money to secure yours and their future.
6-10 years old
Now is the time to teach your children about saving and investing. You should tell them about why you save including for emergencies, future purposes, and retirement. You do not have to show them your balances, but you should open a savings account for them. ONE WITHOUT ACCESS VIA PLASTIC. As a gift, put enough in there in which there would be no fees. Informing your child about the potential of fees will let them know that they should try to avoid unnecessary fees.
Get Them Started Small
If you have a college fund set for your child, first of all, excellent, second, you do not need to tell them about this. They do not necessarily need to understand the concept of compound interest. It is hard enough to have adults wrap their minds around the concept of saving for retirement when retirement is very far away. Imagine how hard it would be to tell your child about saving for something that is likely more years away from their birth or first memories.
Instead get them saving for shorter goals, no longer than 1 year. If they have a toy, gadget, or something in general that they want. Tell them they should put money into their account to save for it. Try this a few times, then you should teach about longer term saving goals such as college (without bringing up compound interest) you are just starting with the basics to guide your children to handle money.
Now let’s bring up the A word. Allowance. Never give your children an allowance. And by that I mean money you give them regularly (at least monthly) just for being their child. This will establish a mindset that your child will be paid just for existing. There are studies that suggest children will understand the value of money better with an allowance. This is true, but your child will learn the value of money and work if they work for money instead.
Instead of an “allowance” pay them for chores. These can include cleaning more public rooms like the bathroom, garage, etc. These can also include yard work. Nothing is wrong with paying your child for a hard day worth of work, in fact I believe there is only good in paying your child for that work. DO NOT pay them for tidying their rooms or for getting good grades, they should not be paid for reaching basic expectations. If you pay them for these they will feel the only reason they should bother is to get paid.
Do not just give them the money. Ask what they plan to use it for. Hopefully, they will say they are saving at least a portion of it. If they say they want to spend all of it, you MUST let them. Never force your children to save their money. If they want to spend most or all of it, the truth is, they are reflecting your behaviors. If you hardly save your money then they will hardly save their own money. Remember, most of what you teach your child about money is indirect.
When they turn 9 or 10, you should start introducing your children to bills. Have them understand the concept that electricity, water, and internet are services that did not magically appear out of thin air as they appear to. They have to be paid for.
One other concept you could try to establish is that the cost in utilities can easily be controlled. For example, you could explain to them that every time the lights or hot water are on, it will cost some money. A good way to show this is to show them a heating bill in June and December (lower cost and higher cost) and an electricity bill from June and December (higher cost and lower cost). This would also be a good time to explain ways to save on both. For example, lights only should be turned on in rooms where they are used. An electrical engineer claims that having LEDs on for one hour costs a little more than 10 cents.
Tell them you will look at the heating/electricity bills from previous years at similar months. If the bills lower, you could off to pay them a fraction of it. I promise you, you will rarely come home with the lights randomly on.
Say whatever you want about Dave Ramsey and his teachings, but I believe most people should take his advice about personal finance. I talked with my cousin about Dave Ramsey’s teachings, he did mention that there are holes in his teachings, which I do not disagree with. However, he did add that “he is effective at teaching people how to live within their means, how to save, pay off debt, and start investing.” I said, “so…what most people need to learn.” He had no argument after that.
My parents and grandparents gave me his cornerstone book “The Total Money Makeover” when I was in my pre-teens. It may seem weird give this book to a child, especially a child with no financial issues. This book does not only show how to get out of financial troubles, but also how to avoid them. Furthermore, it is great to help people to start in investing. I also provided a link to a review of “The Total Money Makeover.”
Make Your Own Class
Do not just have your child read this, read it yourself before them. This will be an effective guide to teach your children about money. Then quiz them, make a summer course out of this, that is what my parents and grandparents did. This should introduce them to the elusive concept of compound interest I kept saying to avoid until this point.
This will be an effective transition to teach them about money even further. If you do not like “The Total Money Makeover” nor Dave Ramsey you should still find some other book can be a guide to teach your children about money. I personally recommend Suze Orman’s “The 9 Steps To Financial Freedom,” or “The Road To Wealth: A Comprehensive Guide to Your Money : Everything You Need to Know in Good and Bad Times.”
After you officially introduce your kids to more difficult concepts. You should start to teach them about investing into assets. You can show them the sites where you have (or at least really should have) invested for retirement and their college fund.
My parents never showed me their balances and only told me they deposit money into both regularly. You do not need to show them the balances. If you are financially well though, I recommend showing them the balance. Explain to them how you made sacrifices to make both assets where they are now. Showing them your portfolio and explaining how you got there is an excellent way to teach your children about money. If you have invested well, your retirement fund should be well into high 5 or 6 digits. Your children will see that obtaining that fortune require discipline and work. The only other way you could obtain that much money that quickly would require being a secret relative to royalty.
If their college fund is doing very well, you should bring up the option to have them start investing. I even contributed some money to my college fund when I was in my early teens. My father even helped me establish another brokerage account to invest in.
What Should Your Child Invest In?
I highly recommend to lean towards more conservative assets, bonds, low risk stocks, etc. While your children should learn to invest, they should not be investing in a assets that is very risky at first outside of a potential retirement fund. Adults can hardly control their emotions when their portfolio is hitting a hard time, how do you expect a child facing extreme hormonal changes to have the emotional control required for that much risk? Furthermore, they are just a few years from making a large step in life, they should only invest in assets for short-term growth that they can use in the near future.
My family offered me to do some more demanding work from home care to landscaping. Thankfully much of these skills were taught in lesser chores. However, these new jobs required me to shatter concrete, build fences, and move trees. And I was paid for all of them. Not only did my parents teach me how to do this, they stood by my determination and skills and many people around the neighborhood asked if I could do some work. My father and mother started my work outside the family with some snow shoveling. At first it was menial work, but it was a lazy winter if we made less than $200 each. Eventually, I moved up to even more demanding work and the >$200 from a single winter frequently happened in a single week of work.
Start your child off with lawn mowing. Pay them at least $10 for them to mow the lawn. Make sure to supervise them as injuries are common in lawn mowing. If your child seems good and they are determined to keep working, tell your friends about this. You will experience the power of networking. Your child will be talked about as it seems fewer children mow lawns today. If they do better jobs they will be asked to do other work.
This will further teach them in the value of work and one of the most valuable lessons my father ever told me. Your reputation will get you very far. If they work hard, the entire town will know and they will be happy to help use their network to get you places.
I did not form a business when I was younger, but CNN states there are many children who do. You may not know how to start a business, but it is important you find a mentor who does. There are many programs designed to teach people how to start businesses including the Jay Morrison Academy. Make sure they have paperwork and permits though, many businesses including lawn care and snow shoveling could require permits.
Nothing teaches your child how difficult interviewing is and how difficult people can be like pushing them to find a job. While working odd jobs will show you how to work, in general, no one who hires you for these odd jobs will think anything less than highly for you. News flash, when you are trying to put your name out there, no one is thinking highly of you, you are a clean slate.
The person interviewing your child will likely not like nor dislike you, which means you will have to compete with other people the employer does not know in addition to others he does. This will introduce your child to the concept of competition and how to sell themselves. They will fail…several times. But it is far better to learn when your child is 16 than when they are trying to start their life on their own.
Credit takes years to develop, which means if you want your child to rent out an apartment with little to no restraints after college, you should start helping them build credit at no later than 18.
There are multiple ways to build their credit. One of the most popular ways is to sign your child onto your card and provide them with one. Be very cautious when you do this. Even if you had a great guide to teach your children to manage money there are still several factors affecting your children. As teenagers, hormones are flowing like the Nile and they may be more prone to impulses than you as an adult. In other words, this will be the first time I will tell you their financial habits do not reflect your own, or at least not while you are an adult. My parents provided my brothers and I with credit cards and we never made them worry financially, but many stories make me believe we were the exception, not the rule.
I never found out what the limit of my parent’s credit card was, and neither should your children. If you get your children a credit card, make sure it has a small limit, and I mean as small as possible, $250 max. Sit down with them about some costs when they show up and ask whether they needed what they bought.
When Not To Help Your Child With Credit
If you have a credit score of less than 700, you will not build your children’s credit too much if you have a credit score of less than that. At this point it would be best to provide them a credit card with a very low limit or even a prepaid credit card.
If your credit is far from stellar you can still help them by building credit. Have a sit down with them and explain to each other how you both can raise your credit scores. I think parents would be surprised at how insightful their children can be. There are other ways to build credit.
College Age (19-22)
College will be expensive, even beyond the tuition. Before they go make sure they are armed with knowledge to minimize their spending. I provided a link of how to do exactly that.
As soon as your child moves out they will have some more independence (or at least should). If you gave your children a credit card you should definitely question if they should keep it. If they show bad habits when they were living under your roof they will show worse ones when they are gone. My parents sat me down and established limits on what I could use the credit card for: books, groceries (not restaurant food), gas, and car maintenance. You should never provide more. If your child complains from such a generous offer, chop up that card, do not even hesitate. You can always arrange an account they can withdraw for such things.
Now let’s say they are spending too much, you must have a sit down and ask them what they are spending too much on. Let me tell you one thing. If you must have a sit down with your child about this, at least one person is going to be unhappy after the agreement. You can sacrifice your own happiness and security for whatever makes your child “happy” at this point. I cannot stop you. That or you can take full measures and refuse to provide money to your child unless they lower their spending. I highly doubt they are spending on things they absolutely need. You are not obliged to provide anything to your child at this point and if you show any obligation to them they will likely take advantage of it. Furthermore, whatever financial issue they are having will only be prolonged with any additional money. This may be a time to review a guide to teach your children about money. Whatever issue they are having you need further help to talk to them about it.
Your children will never stop being your children even as they develop their career and as they have their own children. As their parents, you have the right to ask them about how your children’s finances are, but you have no right to try to change it yourself. You must let them make their own mistakes, much like you had. There are many guides to teach your children about money. Not one will form arms and legs and force your children to make the right decisions. Advice will never force people to do anything.
One thing to note is that while there are plenty of ways to mess up your personal finances, there are almost as many ways to get your finances on track. You may cringe about some methods your child makes. Remember, you are supposed to guide them to manage money, they must find their own way.
Are They Living At Home?
There is a exception where you will have to guide your children about money further, and that is if they are living with you still. Whether this is the right route or not will be discussed in a future post. However, if this does happen it is best to read another guide to teach your children about money. Then sit down with them and act as their bona fide financial adviser.
Teach Your Grandchildren
The best way to help your grown up children with money is to help them teach their own children about money. My grandparents introduced me to Dave Ramsey’s books and books by Suze Orman to make sure I am proficient with money. I still believe one of these guides is the best gift to give to your children’s children. It will ensure wealth is a legacy for your family. Do not go over board with this though.
I am not going to lie. This guide to teach your children about money is hands down the hardest post I have written to date. I wanted to suggest things that I would teach my own children. As of the date I published this post I do not have any children. However, if there is one thing I know about personal finance and wealth building it is that both skills are hereditary. You will not teach your children how to handle money properly unless you can do that yourself.
I myself am a reflection of my parents. I detest unnecessary debt, I am frugal with money, and I do not spend too much, much like them. My mother and father are opposites though. My mother hates taking risks and to this date I am sure she has not put a dime in investments, at least for a decade. She has left the investment portfolio to my father, the risk taker. Despite the differences, they both taught me about money well. My mother showed me the conservative side, my father showed me the less than conservative side. So far both of their lessons have done very well for me. My wife and I have paid for our wedding in cash, we have have no federal student loan, nor credit card debt, and we are both investing in several assets.
As helpful as I believe my words can be, you yourself are the ultimate guide to teach your children about money. You are more responsible for teaching your own children about money that anyone else including myself. Use your own knowledge to forge your wealth, then use your knowledge a legacy of wealth for your family.