As a child, you probably heard the saying “money doesn’t grow on trees.” If it was said in response to your request for a new toy or the latest pair of shoes, you understood it to mean that you can’t always afford what you want, or it simply may not make sense to purchase it at a certain time.
Identify and Master Your Cash Flow
Teach your children to understand inflows and outflows. Typically, you have a set amount of cash flow available for expenses each month. The term “budget” can be off-putting, but it is essential to at least have a thorough understanding of how much money is available, needed for expenses and potentially remaining for savings. As your child begins to earn their own money, have them chip in towards their cell phone plan or other expenses that they benefit from such as gasoline for the car if they’re driving. Remember that an ultimate goal is to give your child enough real life financial experiences that they’re adequately prepared to manage their finances when they graduate and leave home.
Automate, Automate, Automate
Expand your child’s financial skills using digital technology by teaching them online banking functions. Personal financial apps can help them budget and monitor spending. Lead by example and treat saving (for both short and long-term goals) as a fixed expense.
Creating dedicated saving accounts often helps people fund and achieve their goals, such as a set aside account for vacation and holiday spending. By putting savings and fixed expenses on auto pay you aren’t tempted by the cash sitting in your checking account. As your child’s income increases from allowance, to part-time jobs, to full-time employment, they will have the habit of automatically saving a portion of their income. Building healthy financial habits from the start is critically important.
Spend Less Than You Earn
This is the simplest but most important tip. Understand your cash flow to ensure you are spending less than you earn. Teaching kids about money should be start from a young age.
When they earn money or receive monetary gifts, allow them to treat themselves to something with a portion of the money and save the rest for the future. And, when they need more or spend more, teach them the lesson on managing debt to cover excess expenses. It’s far better to learn this lesson under your watch than when they’re on their own.
Save, Save, Save
As children mature, they should understand that it’s not necessary how much you make but rather how much you keep. The amount you save is the determining factor for accomplishing your financial goals, be it something small like a toy or a new electronic, or large like paying college tuition or buying a car.
There is no one size fits all percentage but it’s important to set a target, say 15% – 20% of pre-tax income and create a pathway to do so. It may seem daunting, but the key is to start somewhere and increase the percentage as your income increases.
As young adults enter the workforce, encourage them to enroll in their employer’s retirement plan to begin saving as soon as they are eligible. While they may not grasp why they should think about retirement on their first day on the job, it will help set the foundation for a brighter future.
Plan and Review
Teach your child to set financial goals and review progress. Younger children will need more frequent updates to maintain their enthusiasm whereas every couple of months might work better for teens. Create fun activities or incentives to keep them engaged. As children get older, show them how to outline their competing financial interests and prioritize their importance.
Young adults might be saving to move out on their own, fund expenses for college or ultimately have student loans to pay off. Show them how to write down goals and put together a plan that allows them to make deliberate steps toward achieving them. Make sure it’s measurable so they can determine if they are making adequate progress and adjust as necessary.
When instilling good financial habits in children it is important to lead by example. It’s never too early to begin having financial conversations with your children to teach them the importance of earning and saving money.
Everyday Activities To Teach Financial Literacy to Kids
At some point in your adult life, you may have experienced the harsh consequences of poor money management. It could be when you fell behind on rent payments or got in over your head with credit card debt. If you want your kids to avoid those same pitfalls, then you need to start teaching kids about money sooner rather than later.
Research, including influential work by David Whitebread and Sue Bingham of the University of Cambridge, suggests that many of our financial habits are set by age 7. If good habits aren’t formed early, it becomes harder and harder to point your offspring in the right direction.
How, then, do parents teach the value of a dollar and other key financial lessons? Here are some basic steps you can take immediately to put them on the right path.
A lot of parents are in the habit of supplying their kids with a weekly allowance, which in itself can help teach budgeting skills. Even better would be making them earn that money by doing chores. Drawing the mental connection between income and personal effort is something that will pay huge dividends when they grow up and fly the coop.
These days, you don’t need a big bundle of cash in your wallet to compensate them for the odd jobs they perform around the house. Family-oriented apps like BusyKid and Greenlightlet you assign a dollar amount to each task and send the funds to their account with a few quick taps on your phone.
Encourage Part-Time Gigs
High school can be a busy time for adolescents, with homework and extracurricular activities eating up a substantial part of their week. Still, if they can spare just a few hours to work at a coffee shop or retailer, they’ll probably be better for it. For one thing, they’ll be less inclined to blow their cash on frivolous things when they have to put in some serious work to get it.
You don’t need to wait until they’re old enough for formal employment. You may find that your middle schooler or early high schooler can earn some extra bucks by mowing lawns or walking the neighbor’s dog. Websites such as Nextdoor, and even the newsletter from your homeowners’ association, can be effective ways to connect with local residents in need of a little help.
At the point that they start earning an actual paycheck, you can also help them open a Roth IRA with some of their earnings. If you can, consider helping out with some matching money. That’s another life lesson that you can help them learn early. And it’s a good chance to introduce the concept of the time value of money.
Have Them Contribute to Purchases
Nearly every parent knows what it’s like to take their kids to a store and be inundated with requests for various toys or video games. Perhaps that shouldn’t be a surprise. Younger kids, in particular, don’t yet understand that there’s only so much money you have each month to put down on discretionary purchases.
One way to get the point across is to make them contribute toward these nonessential items. If it’s not their birthday or Christmas, tell them that they have to pay half the cost for a new Lego set or an American Girl accessory. Certainly, your kids will get a better sense of what things actually cost. They’ll also learn that they have to save up their allowance to make bigger purchases and that they have to prioritize, just as you do.
Make It a Game
Who said learning about finances had to be boring? Even board games can help kids learn the importance of thriftiness.
Payday is among the best for teaching kids valuable money management skills. With the next paycheck a month away, players have to make their money last. They can purchase items they think will make them a profit and even take out loans, but getting in over one’s head can create problems, especially when there are other bills to pay. Sound familiar?
Even Monopoly can yield some pretty important lessons, with participants choosing which properties or buying strategies will yield the biggest payoffs and measuring risk versus reward with every move they make.
Open a Bank Account
The venerable piggy bank is a useful savings vehicle for younger children, but when they hit elementary school, consider opening a kids’ account at an actual bank. It’s a good way to instill the importance of gradually building up their balance, and it gives them an introduction to the banking industry.
A more modern approach is to get your preteen a kid-friendly debit card, such as the ones that Greenlight and GoHenry offer. Kids can earn money through chores or an allowance and then use the cards to make purchases online or at a store. They’ll soon realize just how quickly their account balance dwindles when they overdo it. Both products put an emphasis on transparency, giving parents the ability to control where kids can use their card and sending notifications after each purchase.
One of the great disconnects of American society is that we have a capitalist economy yet we send our young people out into the world without a good working knowledge of how finances function. Whether it’s through a desire to shield them from the harsh realities of life or because of a lack of understanding about how to go about educating youngsters about money, we, by and large, are not preparing coming generations for the rigors of investing, credit, mortgages and all the other facets of living in a market-driven environment.
While it would be nice if educating the young about these money matters were made mandatory in all of our nation’s schools – and perhaps, someday, they will be – for now, this introduction to our way of life must begin at home. With that in mind, here are eight important questions on the topic of teaching kids about money.
Is financial literacy for kids really that important?
It is essential for children to learn about money because it will help them live a successful life, secure in the knowledge that they are financially stable and have a genuine respect for the value of the money they earn. In this day and age, children rarely see cash change hands. Their exposure to transactions involves watching mom or dad swipe or click to make a purchase. Because transactions have become so seamless, it is hard to grasp that there is actual money behind that purchase — money in a bank or on a card that comes with an interest payment. Because of this loss of physical context for money, it is especially important to stress the why of it – that buying things and paying bills is not a magic act.
At what age should parents start teaching kids about money?
If they are old enough to ask for things, then they are old enough to learn about money. A four- or five-year old can learn how money is used, even if it’s not using money directly. For example, when a young child behaves well (displaying basic manners like saying “please” and “thank you”) or completes their assigned tasks (getting dressed for school or giving the pet water) they get a gold star. In these cases, their assigned task is their job and the gold star is currency. They can redeem that star for a favorite snack (simulating the purchase of goods), or save up their stars for a bigger reward (simulating a savings account). As they get bigger, say from ages six to eight, those gold stars can be transitioned to an actual allowance.
How does an allowance contribute to teaching kids about money?
When done correctly, an allowance should mimic the role of having a job and earning every penny the child works for. Once a child earns an allowance they can go to the bank to make deposits in their savings account. They can also use the allowance to buy goods, but always using cash. Determining if they have enough for the purchase, figuring in sales tax, counting money to the cashier, and counting the change they get back are all part of the learning process. It’s also important to stress to them how to allocate their allowance money; a certain percentage to savings, a certain percentage to charity and some for spending. The specific percentages can be worked out with the child, as long as they understand that not everything they have is immediately expendable.
Does a savings account contribute to kids’ financial literacy?
This is an aspect of adult life that the child can begin experiencing at an early age. It demonstrates the uses of a bank and allows them to really get the feel for having their own money to deposit. Some particulars to emphasize:
Printing a balance and showing them how their balance keeps increasing every time they make a deposit is an important teaching tool.
Watching the balance grow helps explain the concept of interest.
Learning the physical handling of money, not just debit cards, so that money seems more tangible.
Learning that an account is a safe place to put the short- and long-term savings.
Allowing them to build a relationship with a banker that will help them when it comes time to buy a car or, further down the road, a home.
When should some of the more advanced concepts about money (taxes, insurance, stock market) be introduced?
The more advanced concepts should be introduced as kids get to high school age – and they can now be introduced in real-life situations. For instance, when they are learning to drive, they should learn about insurance. When they are thinking about getting a job you should talk about taxes.
What are some good ways to engender financial savvy?
Introduce them to books at an early age that reference finances.
Parents can open joint bank accounts with a minor and allow the minor to take control of the account with the parent monitoring the activity.
Open a savings account for a child and have them save coins to later deposit into the account. Have them fill out the deposit slip and count out the money on their own and walk it up to the teller to process.
Use current and every day events to introduce them to financial concepts. What is going on around you that can be turned into an opportunity to teach kids about money? Politicians discussing tax cuts or increases… a construction project at their school… paying a toll on a highway – all of these can lead to teaching moments about how money works.
How much insight into the family’s financial state should be given, and how realistic a picture should be painted for the child?
In other words, if a parent cries poor every time a kid asks for something, is that sending a wrong message about the family’s financial stability and does it help or hinder teaching kids about money? If the right messages about finances are being sent, then the parent can talk about financial responsibility by using words that are less fear inducing than “poor” and “broke.” Use the child’s requests for things as teaching moments by asking a question in return. For instance, if they ask for a toy, perhaps a parent can respond with something like, “Don’t you already have one of these at home? What is the purpose of having another one? If we get this one, that takes away money that we could use for food or something really important.”
As you know, parental behavior has a huge impact on how the child views the world, so in teaching a child about sound finances, the family should practice the same. And if they aren’t, it would be a good time to start to practice what you preach. That said, even if you live paycheck to paycheck you can share the family financial picture based on common themes:
It’s the time of month to pay our bills.
It’s that time of year to do our taxes.
It’s that time of year to make that contribution to our favorite charity.
Our air conditioner broke and we have to get a new one. How much do they cost and what are some ways we could pay for it?
Have your child be in charge of one bill to pay with a check from the parent’s account. They can write out the check and have the parent sign the check. The utility or water bill is a good choice because usage has a direct effect on the size of the bill.
When it’s time to buy a car, involve children in the process by discussing putting money down, monthly payments, trade ins, interest and the consequences of not making payments.
How does a parent stress the importance of money in our society and how it works without making it seem too important?
By teaching kids about money, budgeting and savings at an early age without being negative about it, you’ll be able to better strike the balance between necessity and obsession. Making a big deal about money in a negative way could get a negative result. That is why positive reinforcement is helpful when children are showing the correct behaviors. Encourage them when they express an interest in wanting to go to the bank or to deposit coins in their piggy bank. Plus, there’s the added benefit that they are improving their math skills!
Remember that while society teaches us how to spend and how to be consumers, it is not always evident to a young mind how those purchases are made. The almost magical nature of the aforementioned swipe-and-click way of transacting business must be revealed to them if they are to avoid a lifetime of financial struggle. We teach our children to do well in school, and to get a good job to make money, but we don’t teach them enough about what to do with that money.
Tips to Teach Your Kids about Smart Money Management
Examine your own attitudes about money. Remember that children learn a lot about how to handle money by watching their parents. Be careful to set a good example – and don’t be afraid to admit if you don’t know how to do it. Now’s a great time to learn together!
Give your child an allowance and let them make their own spending choices with it. As soon as your child understands that people use money to buy things they want, give them a small weekly allowance. Raise the amount each birthday to keep it in line with your child’s reasonable personal spending needs. Encourage them to plan purchases in advance. Giving them an allowance helps you balance your budget too, but only give them as much as you can afford. A guideline is $0.50 – $1.00 / year of age of your child.
Expect your child to help with family chores. Helping around the house is part of being a family. Give allowance strictly for learning how to manage money. It’s better for you child to make small “mistakes” now than bigger mistakes later on.
Provide extra income opportunities. Occasionally, offer your child an opportunity to make a small amount of extra income by doing an extra chore. Help them decide what to do with the extra money they earn.
Teach your child to save regularly. Set up a process for saving money in a piggy bank or bank account. Regularly monitor how much has been saved, and talk to your child about goals for using their money.
Help your child discover the satisfaction of sharing. Encourage your child to identify ways they can spend money on helping others.
Show your child how to be a wise consumer. Before your child buys something, review alternative ways of spending the money to emphasize the necessity of making choices. Teach them to comparison shop for prices and quality. Discuss how advertisers persuade people to buy their products, and encourage your kids to be savvy about commercials.
Teach your child a healthy attitude towards credit. When your child is old enough to understand what credit is, consider allowing them to borrow a small amount of extra money from you to make a major purchase. Negotiate how much your child will repay each week from their weekly allowance, and then be very careful about collecting the money and keeping track of the remaining balance each week until the debt is repaid.
Teach your child the value of wise investments. When your child is old enough to understand interest rates and rate of return, play an investment game to learn about alternative investment strategies and financial risks. Websites can be very helpful.
Involve your child in family financial planning. Let your child see you planning your budget, paying bills, shopping carefully, and planning major expenditures and vacations. Explain the affordable choices, and allow kids to participate in the family’s decision making process. Set a family goal that everyone can work towards.
You need to teach financial education for kids as it will help them live a successful life, secure in the knowledge that they are financially stable, and have genuine respect for the value of the money they earn. In this day and age, children rarely see cash change hands.
Their exposure to transactions involves watching mom or dad swipe or click to make a purchase. Because transactions have become so seamless, it is hard to grasp that there is actual money behind that purchase — money in a bank or on a card that comes with an interest payment. Because of this loss of physical context for money, it is especially important to stress the why of it – that buying things and paying bills is not a magic act.
Parents are constantly teaching their children about money management, whether they’re aware of it or not. Kids pick up on whether you plan your shopping, put money into savings, or spend irresponsibly.
At its most fundamental, teaching kids about money is about setting a good example. You should also take the time to help your children learn how to manage money with specific lessons. Here are good money management lessons to teach your kids:
1. Start With Physical Currency, Then Teach About Banks
With younger children, physical currency is a great, tangible way to learn about money. Whether you teach them to put their coins in a piggy bank or keep paper money in designated envelopes, handling money demonstrates the basics of money management.
As kids get older, around ages 9 to 12, they are capable of learning about savings accounts and why they’re important. Kids in this age group can set aside part of their allowance to put into an interest-bearing bank account to get into the habit of saving money for later. High school students can learn to use representational currency, like debit cards, for money management.
2. Teach Kids About Saving, Sharing, and Spending with Allowance
Whether allowances are tied to chores is an individual decision for each family. One method that works well is to give kids a flat allowance in exchange for the basics expected of them (like making their beds and feeding household pets), and giving them the opportunity to earn more with bigger chores (like mowing the lawn or handling the family laundry).
However you deal with allowances, you should emphasize that saving and sharing are just as important as spending. Kids can set aside money for saving and for charity in separate piggy banks or envelopes if they’re young, while older kids can use a bank account for setting aside portion of their allowance.
3. Help Kids Learn to Comparison Shop
Children in elementary school can understand the basics of comparison shopping. Let kids see you making a shopping list and looking at sales circulars in order to note where certain items cost less.
Take your child grocery shopping with you and show how you compare brands to make your money buy more. When your child wants to buy something with her allowance or money she’s been saving, show her how to comparison shop with online sales circulars and by checking store websites for prices, so she can get the most for her money.
4. Encourage Older Kids to Earn Extra Money
Middle school-age kids may not be eligible to get a traditional job, but that doesn’t mean they don’t have opportunities to earn extra money. Here are some ways kids can earn a little extra:
•Collecting recyclables and taking them to the recycling plant •Organizing and setting up a family garage sale •Doing yard work in summer, and snow shoveling in winter for neighbors •Babysitting •Doing housework for elderly or infirm neighbors •Tutoring students who are struggling with academic subjects •Pet sitting and dog walking
5. Teach Children the Importance of Giving
While earning, saving, and spending are important, so is helping out those less fortunate. Explain to your kids why you give money to charity and encourage them to give some of their allowance or other earnings to the less fortunate. Learn about what your child feels strongly about and show him ways to help. If he loves animals, for instance, help him raise money for a local animal shelter.
If he’s especially fond of his grandparents or great grandparents, find out if he can help with your local Meals on Wheels program. Children should understand that giving of their time is an important way to help others when they don’t have a lot of money to donate.
There are a lot of good reasons to teach your kids about money. For one, you don’t want your children repeating your own financial mistakes. Also, if you raise financially shrewd adults, chances are they won’t someday be asking you for money. By helping them, you’re helping yourself.
Teaching your children about money is also simply the right thing to do.
Whatever your motivations, it can be a challenge to figure out how to impart your hard-earned financial wisdom. For instance, at what age do you start? How deep into the weeds should you go? Is it better to show them how to manage money than tell them?
How to Teach Your Kids About Money
As you can imagine, there are many approaches to teaching kids about money. Some parents believe in allowances; others don’t. Some companies market debit cards to elementary school children, and some parents think that’s an insane age to be learning about a debit card, no matter how many parental controls are instituted.
What matters, of course, is what you think. But here are a few general rules of the road:
Talk to your kids about money. Mitchell Kraus, the founder of Capital Intelligence Associates in Santa Monica, California, echoes what many experts say: “The best way parents can teach their children good financial habits is by discussing the money decisions that they make.”
Kraus acknowledges that everyone makes different financial decisions, but you should at least discuss your thinking on spending and saving with your kids.
“Most Americans have a choice on how to spend their money,” he says. “Some choose nicer cars and houses. Some choose experiences. Going over the choices with your children helps them understand your values and that life is full of choices.”
Consider an allowance. There are good arguments for not giving your child an allowance. Some experts say children shouldn’t get paid for doing expected chores around the house – and for being part of a family. But as Kraus points out, “Giving a child a small allowance also helps children learn about making choices with their money.”
Continue discussing finances with your child and eventual teenager. Don’t make it a one-and-done conversation. “Where most parents stop short is following up with the children on how well those choices turned out and what choices they might want to make in the future,” Kraus says. “Across cultures, there are stories about great wealth being lost in three generations.
The first generation works hard and lives on a tight budget to create wealth. The second generation sees the hard work and sacrifice and understands that choices need to be made about money. The third generation has never heard a fight at the dinner table about money and tends to blow everything, not understanding its value.”
Get your child involved in charitable giving. This could be something you do at church, or you and your child could raise money for a good cause.
“Engaging your children in thoughtful philanthropy is a hands-on way to share your family’s values and teach your children about saving and giving back to their community,” says Ross Cohen, a certified financial planner and wealth advisor at Bartlett Wealth Management, a firm with offices in Cincinnati and Chicago.
Ideas for Your Kids to Earn Money Right Away
Another way for kids to learn a lot about money is by earning it. We’ll leave out the traditional lemonade stand idea since there’s still a pandemic and all. Depending on the age of your child, you may need to help them with some of these ideas.
Babysitting. Yard work for a neighbor. House and/or pet sit for vacationing neighbors. Sell crafts on a website, such as Etsy. Organize a yard or garage sale. Shovel driveways for neighbors in the winter. Do extra chores for money. Wash neighbors’ cars. Collect recyclables. Tutoring.
6 Real Money Lessons Every Parent Should Teach Their Teenager Before College
It is never too early to start practicing good money habits. In fact, the earlier teenagers are exposed to good financial habits, the better chance they will become financially savvy. This is an important life lesson in general, but especially if college is on the horizon for your teenager. Becoming a college student is probably one of the most exciting and immediate milestones for high school students when they look towards their future. Not only do teenagers feel a sense of freedom regarding important life decisions, but they will also be handling their own finances – including decisions regarding loans.
For some, the transition to handling their own household finances will be an easy step, for others, it might represent a 12-foot hurdle. Give your teen the best financial head start possible by working financial topics into everyday conversations. By helping your teen learn money management lessons with smaller amounts of money, by the time they graduate college, they’ll be prepared for managing their finances with a full-time job.
If you’re not sure where to start the conversation with your teen, try some or all of these six ideas:
1. Give them an allowance
Allowances can be a controversial topic. For some households, this lesson works extremely well, and for others, it may be less feasible. Parents who find success with allowances have a set of rules and conditions their children have to follow in order to earn their allowance. It might seem best to tie the allowance to chores being completed, but try to resist tying all the money to chore-related tasks. Children should be expected to assist with family tasks and not have an expectation of always being paid for helping around the house. A key component to being an active member of a family is participating in daily tasks. Create not only a mix of tasks (a chore, education, or sports-related) but achievements as well, and be creative with it.
For example, you can provide an allowance of $2 per day, but perhaps with the condition attached that the child is responsible for paying the additional amount for their gym shoes beyond the $40 you are willing to pay. (Be prepared, as well, for a child that then chooses to select a pair of sneakers that cost $28 and is expecting the $12 difference of what you were willing to spend. In this event, you are well on your way to raising a financially savvy kid.) Other parents choose to allow their teen $20 a week for gas, but the child has to fill up the tank. If there is any extra money left over from filing the car with gas, they can keep it for other spending or saving goals. You’ll be surprised at the success of giving children an allowance and empowering them to use it responsibly.
2. Work on a budget
Teenagers, especially high school students, want to have fun and enjoy their time to the fullest. This does not, though, always come with the responsibility of paying the greatest attention to their spending. It can be even harder when teenagers don’t know how their parents are managing their finances—good practices and discipline are the best example you can provide your child(ren).
Budgeting can’t be mastered overnight, which is why it must be taught. Ask them to be involved in your weekly household goods shopping and in creating monthly budgets. If they’re working a part-time job, assist them in creating a budget plan and saving for college or other saving goals such as their own car. Children crave discipline and boundaries—and financial discipline is so very important. Budgets help teach them that fun is possible, but that it has limits and comes after their responsibilities have been met.
3. Teach them about debt and its consequences
High school students, regardless of their post-12th grade plans, should know about the cost of going to college and the consequences of debt. Even if parents plan to pay for the child’s entire college education, things can change. Some parents make the mistake of putting education first, but not talking about the work it took to build-up the college fund. Again, teaching and exampling discipline and focusing on a long-term goal is key to success.
Let teenagers make monetary mistakes, and show them how every action has consequences. If the teen goes over budget one month, they need to learn that in the next month they will have to cut back on a category, such as going out for ice cream. The same goes obviously for college. Going shopping and for lunch—while therapeutic—can have expensive long-term consequences. Help teach your teen that the $60 shirt and $20 burger platter actually costs significantly more than $80 in the long-term when it comes to paying back student loans over 10 years with interest. Showing them the burden of debt will be one of the greatest lessons that every parent can teach their children, regardless of the parents’ income. While it is much easier to simply hand out cash and cover all of your child’s “expenses”, having them put some skin in the game and figure out debt management can be invaluable.
4. Practice delayed gratification
The toughest lesson for everyone, especially teenagers, is making them wait to buy what they want. We all have a natural urge to buy things we want or like immediately. For that reason, it is even more crucial that parents practice delayed gratification with teenagers and resist buying things they want versus what they really need.
For instance, if their classmate shows off the latest tech gadget or fashion trend and thus your teen wants to have the same, tell them to wait until the next week or even the next month. If it’s just a want, make the teen contribute part of the cost, too. The age-old question of, “Is it important enough for you to spend your money on it?” is huge in teaching want vs. need. Chances are, once time passes and they’re faced with paying for it themselves, the desire will likely fade. It is also important to note that if they do pay for it themselves that you let them do so. It is a bad lesson to pay for the item at the 11th hour because you will have undermined your own credibility and the practice of delayed gratification. Another bonus of having the child pay for the item themself is that you will be pleasantly surprised at how well they take care of the item(s) they purchase with their own money!
5. Instill good credit score builder habits
The term “walk the walk” is especially important in teaching kids financial well-being. Kids are a sponge and absorb more than we likely know. It is always a good idea to be a financial role model to showcase healthy money habits and attitudes on a daily basis that your teenager can follow. Be certain to focus on just that child when reviewing their financials habits, and avoid comparing them to you or their siblings. You want to build good habits by empowering them to follow your example, not just doing something because they have to. They will eventually take ownership of good habits (or bad habits, depending upon the example you provide) and will continue to use them throughout life.
Properly educating your child on financial consequences can help your teen to make the right choice when making financial decisions. One important consequence to relay to your teenager is how a credit score can affect their future finances. One avenue to help your teen have a good credit score before going to college is giving them access to a credit card. Of course, before giving them a credit card be sure they have shown and demonstrated good money habits. It’s easy to overspend with a credit card, which is a lesson young adults often have to learn in college when credit card companies are offering cards left and right. So walk them through the fees and benefits of different cards, and best practices regarding credit card usage, so they can work towards the perfect credit score. Many graduates find themselves with little to no credit when it’s time to buy a car or get a loan or even rent an apartment if they haven’t started working on building their credit score throughout college. Prepare your child ahead of time, and they will thank you for it.
6. Make small savings goals
Take baby steps toward building a savings account for their own goals, but be stern in importance of saving. If you provide an allowance, mandate that the first 10% go directly to savings before any other spending occurs. Once this habit of saving—frankly, of paying themselves first—takes hold, it will become second nature as they move through life and get better jobs and make more money. It is also important that with this savings, they have the ability to work toward a goal. Saving just to save is important, but it is equally important to save for something important. Ask your child what they want to have the most and help them define their goals. It could be a new iPad, a pair of new kicks or a trip with their friends. Whatever it may be or how ridiculous it may seem to you as an adult, it will help motivate them to save.
Once they are motivated to save, open savings account for teaching teens about money to which they can contribute each week. Perhaps even offer to match their contributions up to a certain amount each month.
At the end of each month, show them the monthly bank statement. Seeing their progress will push them to put more toward their goal each week. Then once the first savings goal is accomplished, you and your teen can start moving to bigger and more valuable goals, like their first vehicle.
When talking to teenagers about money, you’ll quickly learn that many believe they are experts on the topic. As teens, they understand you go to work to earn money and that it takes money to pay bills and buy things. Most teens also know that saving money and donating to causes, and those less fortunate is essential.
If your teen has figured all of that out, they’ are on the right track to managing their money.
Us adults know, though, there’s still a lot more for them to learn. As children mature and start making their own money and spending decisions, the stakes get higher. That’s where we have to take our job as parents seriously. While your teen may think they know it all, becoming financially literate is a process.
Just like your child takes math, history, science, and language arts classes at school, there are essential concepts your teen needs to master about money.
Ten Money Lessons for Teens
1. Needs vs. Wants
Your teen may think they need the latest smartphone, video game, or even a car. And be prepared for a well thought out rationale if you question why they think it’s a need.
While your teen may have some good reasons to call something a need, make sure you are firm and give examples when discussing the difference between needs and wants.
A smartphone might be a need, but the latest smartphone is a want.
Without a new video game, they might miss playing with their friends online, but it’s still a want, not a need.
It might help everyone if your teen can drive to school or work, but in many cases, an extra car is wanted more than it’s needed.
We don’t want to send a message to our children that their wants don’t matter, though. If they budget for their needs and have an emergency fund in case something unexpected happens, they can set up savings accounts (also known as “sinking funds”) for their wants.
Practicing delayed gratification by resisting the urge to buy things on a whim will help prevent them from going into debt in the future.
2. Spend Less Than You Earn, Save The Difference
Your teen understands negative numbers from math class, so it shouldn’t be hard to transfer that to money. When you consistently spend more than you make, you will end up with a negative account balance.
We need to teach our teens that if you spend every dollar coming in, you’ll never get ahead.
When you spend less than you earn, you can pay your bills, avoid credit card debt, save for the things you want, and even invest for your future.
Your teen’s goal should be to grow the gap.
The bigger the difference between what they earn and what they spend, the faster their savings will grow.
3. Track Expenses and Start a Budget
Whether your teen has a job, gets an allowance, or has money from gifts in an account, they should track what they spend and set up a simple budget.
Most teens are surprised to see where their money goes when they start tracking all of their spending. If your teen has a smartphone, they can use a free app like Wally or EveryDollar rather than saving receipts.
Once they have a better sense of how much they spend and in what categories, your teen can create a simple budget with the same money management apps.
In the budget, your teen should consider setting aside money to save, spend, and give. This helps teens put cash in the bank while still allowing them to spend responsibly. By creating a giving fund, they can donate to important causes without worrying about running out of money.
4. Save, But Start Investing Early
When your teen starts budgeting and works to grow the gap between earning and spending, they’ll have more money to save.
Consider introducing your teen to high-interest savings accounts for funding short-term financial goals. While the interest they earn on small account balances might not be significant, teach them how .01% and 2.0% annual percent yield (APY) savings accounts compare.
For example, you’ll earn $20 in interest if you have a balance of $1,000 in a 2.0% APY savings account for a year. The same $1,000 will only earn $.10 after a year in a .01% APY savings account. Teach your teen that you always want your money making more money!
Once teens have accumulated some savings, they should consider investing too. The longer their money is invested, the more wealth they will build over time – even if they deposit tiny amounts.
Introduce your teen to simple investing terms and help them open an investment account. At this point, you want them to use the “set it and forget it” investing strategy knowing that this is money for long-term goals in the very distant future.
5. Use the Power of Compound Interest
Your teen now understands why they should use a high-interest savings account. After all, teens love money! Why should they settle for a local bank only giving a few pennies of interest when an online bank lets you earn dollars?
Now it’s time to show them the power of compound interest. When they invest money, and it starts making money, they’ll keep earning interest on top of interest. If they leave the money invested over several decades, they’ll see the “magic” or power of compounding – even if they never add more money to the initial investment.
6. Understand Gross vs. Net Pay
When your teen gets a job, they’ll count the days until their first paycheck. But the excitement of getting paid can turn to disappointment real fast.
When your teen calculates what their paycheck should be, they’ll likely multiply the hours worked by their hourly rate. But kids don’t realize, or they forget there are withholdings and deductions taken from earnings.
If you want to prevent your teen from being shocked by their first paycheck, make sure they understand gross vs. net pay.
Money will be withheld for federal income tax, Social Security tax, Medicare tax, and any applicable state or local income taxes. There may also be deductions for any retirement plans your teen may be eligible for through their employer.
Your teen should know they may receive a refund after filing a tax return if too much money has been withheld from their paychecks during the year. But they should get used to planning their budget on their net pay instead of the higher gross pay they anticipated.
7. Good vs. Bad Debt
Teens need to learn about different kinds of debt. While all liabilities need to be repaid as a part of every budget, one type of debt can move you forward while the other holds you back.
“Good debt” is money you borrow that helps you reach your goals. Student loans can be considered good debt if they help your child earn a degree leading to employment.
But the amount of good debt someone takes on can also be a real problem. The average student loan debt per person in 2019 is over $30,000.
Teens should consider all of their options before taking out massive student loans to fund their education. Is community college for two years an option? What about living at home or graduating from college in three years instead of four?
You want them to avoid “bad debt” at all costs. Bad debt usually carries high-interest rates and is often used to purchase our wants instead of needs. Swiping a credit card too often can put teens in a cycle of debt that’s hard to recover from.
8. Your Credit Score Matters
As young adults age, they may be able to open up credit cards. Even with small lines of credit, your teen can make mistakes such as making late payments, keeping high balances on their account, or only making minimum payments.
This can prevent them from paying off their debt and negatively impact their credit score. A cycle of financial problems results when credit card debt grows.
Teens need to understand that building a high credit score can save them money on costs, including car insurance or cell phone contracts. When your teen is ready to leave the nest for their own apartment, having a high credit score can increase their chances of approval on rental and loan agreements and may save them money on utilities.
Teach your teen that their credit score can be damaged quickly by irresponsibility. Also, consider talking to your kids about reviewing their credit report each year to make sure no one has opened an account in their name.
Tell your teen to watch out for sites that want you to pay money to get your credit report. Everyone has access to a free copy of their credit report from each of the three credit bureau’s once a year from annualcreditreport.com
9. Big Loans Can Really Affect Your Life
Teens can be faced with adult-level decisions when it comes to taking out large sums of money for things like cars and college. Before they earn a steady paycheck, they can be thousands (or tens of thousands) of dollars in debt without understanding how long or difficult it will be to pay the money back.
A car might only cost $10K to them – or a few hundred dollars a month. But young adults forget that’s only one expense they’ll have as they become more independent.
When teens consider college loans, they’re thinking about their first “real” job and how big their paychecks will be. They may not realize they could be paying back loans for decades – even if they have good jobs.
Teens considering big loans need to use student loan calculators and look at loan amounts, terms, and interest rates to better understand the debt they want to take on.
If they’ve already tracked expenses and started using a budget, have them project all of the expenses they could have as a young adult and compare it to their net pay from a career that interests them. When you add in a student loan payment, the idea of taking out a big loan may not seem like such a smart decision.
10. You Can Be an Entrepreneur Without Taking on Much Debt
Some teens are natural entrepreneurs and have terrific ideas for starting small businesses. But they may spend time online trying to figure out how to grow their business – including spending too much money to get their business started.
You don’t want to dampen your child’s enthusiasm by only talking about money. But you also don’t want your teen (or yourself) to take on too much debt before you know that they’ll stick with the business. And that it will be profitable.
Help your teen figure out ways to market their business, get the equipment they need and find customers for as little money as possible. This will also help them make money faster because they won’t have a debt to pay off.
If their business takes off, they can put their profits back into their company to help it grow. Or they can find other low-cost options to help scale their business.
Helping Your Teens Build A Bright Financial Future
Teaching teens about money is a process. Some of the lessons work well with younger teens, while others won’t be appropriate until after they get their first job or graduate from high school.
When it comes to money know-how, teenagers’ expertise is often limited to one particular aspect: spending it.
As with most aspects of children’s development, parents play an important role in teaching teens about money and helping position them to make smart decisions when they move on to college or start living on their own.
Follow these seven tips to help give kids some money smarts that may pay off big over their lives.
1. Set them up with bank accounts. Start with a checking account for daily spending and a savings account for future goals. For the best balance of supervision and independence, open a teen checking account that gives you joint account holder status and complete access, while also letting your child monitor and manage the account online or with a smartphone.
Give them a debit card linked to the checking account. In addition to minimizing the need to carry cash and providing a record of where money is being spent, debit cards have two other pluses. “They give you the convenience of a credit card, but since they cover purchases directly with money from a checking account, they help keep guardrails on teens’ spending,” Montanaro says.
2. Put them in charge. Instead of buying gas, clothing and other basics for your kids, allot a certain amount of money a few times a year and let them know they’re in charge of making it last until their next “payday.”
This simple move may teach them more about living within a budget than they’ll ever learn from reading about it. “Having money and realizing it’s for a certain purpose can help teach them to resist making impulse purchases with it,” says Stephanie Bell, a spokesperson for Junior Achievement USA, an organization focused on giving young people the knowledge and skills to achieve economic success.
3. Foster a savings mindset. Whenever kids receive money — from jobs, allowances or gifts — encourage them to pay themselves first. They should put a portion of it into a savings account for future use. If they have a big purchase in mind, help them set a goal that’s specific in two dimensions: how much money they need and when they need it. Then work with them to figure out the amount and frequency with which they should put it away to hit their target. Just like adults, teens should learn early to make their money work for them.
4. Teach them some insurance basics. If you have a teen driver, start with car insurance. Explain the purpose of insurance: to cover big costs that would otherwise be difficult to cover on their own. Review the policy and give special attention to deductibles — a concept that’s also useful when dealing with other coverage like health, renters or homeowners insurance.
Consider telling them they’ll be responsible for helping cover the deductible for accidents they cause. “If they have skin in the game, they’ll better understand the concept and may become more cautious behind the wheel,” Montanaro says.
5. Create credit smarts. Many young adults have a tendency to lean too heavily on credit. It doesn’t take long to do damage.
“I see plenty of people in their 20s who have already dug a deep hole by carelessly managing even small amounts of credit,” Montanaro says.
That hole isn’t just measured in dollars: A damaged credit score can limit their ability to qualify for apartment leases, auto loans, lower insurance rates or mortgages. And all that interest they’re paying takes a bite out of saving for their future goals and dreams.
Explain how credit works and how purchases can grow increasingly expensive over time, once interest is considered. Bell recommends sharing a credit card, auto loan or mortgage statement with your teen to help illustrate the basics of credit.
6. Discuss the economics of higher education. As the college decision approaches, parents should help teens balance costs and benefits. Junior Achievement’s JA Build Your Future app lets them crunch the numbers. The key lesson here: “Students shouldn’t incur more student debt than they can reasonably afford to repay based on their career interests,” Bell says.
7. Plant a retirement seed. “It may not be top of mind in their teen years, but help them look forward and understand how regularly saving even a modest amount of money can have a big impact on their future,” Bell says.
The earlier teens understand that retirement is the biggest expense they’ll ever save for, the better off they may be. Time is on their side. The power of compound earnings means that the earlier they start saving, the more money they’ll have.
If your teen earns income, think about opening a Roth IRA. A jump-start might just turn your teen into a future millionaire.
Money Management 101: Tips for Your Kids Entering the Workforce
When we’re young, we have so many lessons to learn—one of the most important being how to manage our money. If your kids are starting to enter the workforce, whether it’s a part-time job just for the summer or a full-time job after graduation, they must know how to practice healthy financial habits. Here are the five most important things to teach money management for children when they start working.
Be Realistic About Budget
When teaching your children entering the workforce about money management, you should first focus on budgeting. Many of us learn the value of keeping a budget from a young age, but it’s hard to know exactly how difficult it can be to stick to one until you’re living on your own with bills, expenses, and other incidentals to pay. That’s why it can be integral to your child’s financial literacy to teach them how to be realistic about their personal budget.
To set a realistic budget, your kids should consider the following:
What expenses are consistent every month (e.g., rent, student loan payment, car insurance)? What expenses vary every month (e.g., utilities, groceries, medical bills)? For the expenses that vary, what are the most they anticipate paying in a given month? How much would they like to spend on entertainment and other luxury expenses? How does this compare to what’s leftover after necessary expenses? What are their savings goals and how much can they commit to putting aside to work towards those goals every month?
Remember: It’s always better to stay under budget and have funds left over at the end of the month rather than an end in a deficit. So being honest about how much they might spend on things like dining out or buying concert tickets is key to sticking to a realistic and reasonable budget.
Pay Down High-Interest Debt First
It’s likely that your children will be entering the workforce with student loans to pay off. Before tackling any ambitious investing or savings goals, they should realize the value of paying off high-interest debt first. This means, especially with private loans—which are more likely to have high-interest rates—they should focus on paying off the most they can afford every month.
Take Advantage of Employer-Sponsored Benefits
Especially if your children are starting in the workforce with a full-time job, they may have benefits offered to them by their employer. It’s essential to teach them the advantages of using their employer-sponsored benefits, including 401(k) plans and healthcare plans.
While your children may not see the benefit of saving for retirement in their late teens or early twenties, getting started early can make a world of difference, especially when it comes to employer contributions. You can explain the benefit of participating in a 401(k) plan by making it clear that employer contributions essentially represent free money for the purpose of saving for retirement. The more your children contribute to their plans early, the more they’ll receive from their employer. And those funds will compound over the course of their lifetime, setting them up for success in planning their ideal retirement when the time comes.
Set Short- and Long-Term Savings Goals
Another lesson to teach your kids entering the workforce is how to set both short- and long-term savings goals. Putting money aside in a savings account is a good starting point, but setting clear and measurable financial goals can make a big difference in your children’s money management skills.
Start off by having them set a goal for a year from now. Is there a specific trip they want to take? Or an item they’d like to buy? It could be as simple as wanting to fund a camping trip or as lofty as wanting to buy a new car. Those short-term financial goals are best suited for regular savings accounts.
Ask your kids to consider long-term savings goals—where would they like to be in 10, 20 or 30 years? Do they eventually want to move to a different city, buy a house or have children of their own? Even if they don’t have a clear picture in their heads, it’s a good idea to get them thinking about the value of saving and investing for long-term goals early.
Don’t Be Afraid to Ask for Help
Probably the most important tip for those entering the workforce is that there are no stupid questions. We all start somewhere when it comes to our financial literacy, and it’s always best to ask for help if they’re unsure how to handle a financial situation or reach their financial goals. While you, as a parent, can be a great guide to your children, chatting with a financial professional can be a great chance to have a neutral party educate your children on best practices when it comes to managing their money.
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Tim Connolly 