Money gives people — both young and old — decision-making opportunities. Educating, motivating, and empowering children to become regular savers and investors will enable them to keep more of the money they earn and do more with the money they spend. Everyday spending decisions can have a far more negative impact on children’s financial futures than any investment decisions they may ever make.
For all the effort parents put into helping their children understand the value of a dollar, and for all the effort schools put into formal lessons in personal finance, most children still grow up into adults who can’t properly save, spend, and budget.
Teaching kids about money and finances is no small task but can be made easier when you break it down into age groups. Turn your day-to-day activities into money learning experiences. Trips to the bank, store, or the ATM machine, can be a perfect opening for a discussion about your values and how you use money. When children are very young, you can work money concepts into your child’s imaginary games, like playing pretend store or restaurant. Read on for some fun, simple ways to introduce money, savings, and finances to your child.
Ages 2 and 3
Hello Money – As soon as children can count, introduce them to money. Take an active role in providing them with information appropriate for their age. Observation and repetition are two important ways children learn.
Counting Coins – Kids as young as three years old begin to pick up intuitively that those coins and papers in your wallet or purse have value, but they don’t necessarily understand how. Start by teaching kids to recognize coins and how much each is worth. A 2 or 3-year-old faced with a choice between a penny, dime, and nickel will almost always choose the nickel because of its size. But while very young children won’t fully understand the value of money, they can begin to learn the names of coins. You and your child can trace around the outside of various coins and color in the shapes. Then invite your child to match the coin to the image while discussing each one’s name. (Sidenote: Toddlers may try to swallow coins, so always provide close supervision.)
Store Bought – Young kids love to play store, but an imaginary shop in the living room is more than just a fun way for your child to exercise his imagination. By exchanging play money for goods, your child begins to understand the basic concept of of commerce. Use cereal boxes, fruit, sponges, or paper towels as store items. Together, make pretend money and shop till you drop.
Ages 4 and 5
Shopping Trips – Use regular shopping trips as opportunities to teach children the value of money. Going to the grocery store is often a child’s first spending experience. Before heading to the supermarket, ask your preschooler to help you clip coupons. When you’re at the store, hand her the coupons and ask her to keep an eye out for the products. This will make her feel like she’s helping, and it’s an easy and fun way to talk about saving money. As an added bonus, your child will learn numbers and even letters as she recognizes her favorite cereal or his favorite type of juice.
3 Jars – Help children learn the differences between needs, wants, and wishes. This will prepare them for making good spending decisions in the future. To teach kids how to budget from their allowances, it helps to be very visual. Explain to kids that their money–just like yours–gets divided into money to save, spend, and share. Get three clear plastic jars, label each, and help your kids to count out their allowance payment into each jar. One can be for saving, another for spending, and another for charity. Keep doing this until they are old enough to open a bank account.
Dining Out – Most preschoolers would rather play imaginary restaurant at home than go out for dinner. It playfully promotes a variety of skills, such as setting the table, learning good manners, and making change. Many 4-year-olds have to be reminded after the pretend meal that they have to pay the bill but once they understand the concept, they get very excited about paying with pretend money or making change as the cashier.
Ages 6 to 8
Denominations matter – When giving children an allowance, give them the money in denominations that encourage saving. If the amount received is $5, give them 5-1-dollar bills and encourage that at least one dollar be set aside in savings.
Bank on it – Beginning the regular savings habit early is one of the keys to savings success. Once your child understands the concept of giving, saving, and sharing, he or she may need a place to put his money. Remember, don’t refuse them when they want to withdraw a portion of their savings for a purchase–This may discourage them from saving at all. Make a trip to the bank a big event. Help your child open a savings account, and encourage him to make regular deposits. As the balance grows, you can discuss the concept of interest and how the bank pays people back for saving their money.
Advertising Savvy – Show children how to evaluate marketing ads on the TV, radio, or in print. Will a product really perform and do what the commercials say? Is a price offered truly a sale price? Are alternative products available that will do a better job, perhaps for less cost, or offer better value? Remind them that if something sounds too good to be true, it usually is. This is often a good time to talk about brands and that store brands generally cost less than popular brands but are essentially the same.
Quarter Books – This is also a good age to take up coin collecting as a hobby. You can spark your child’s interest with state quarters. Visit the kids’ section of the United States Mint Web site (www.usmint.gov/kids) with your child and learn about the evolution of U.S. currency. You’ll also find online games and cartoons to keep your child engaged.
Ages 9 to 12
Start at home – Have family discussions. There’s a consensus that financial education should begin at home. But the way many parents cover the topic at the kitchen table needs a serious upgrade. Many parents share information on general topics like saving, spending, and earning, but tend to stay mum on sensitive topics like the family’s specific income and family debt.
Price Check – One way to teach comparison shopping is to read the store’s price labels with your child, look at the size and price, and compare the bulk amount per cent. Don’t forget to take quality into account. For example, one week buy brand-name paper towels. The next week, try a generic brand. Then discuss the differences and decide together if the brand name is worth the extra cost.
Goal Setting – Setting goals is fundamental to learning the value of money and saving. Young or old, people rarely reach goals they haven’t set. Nearly every toy or other item children ask their parents to buy them can become the object of a goal-setting session. Such goal-setting helps children learn to become responsible for themselves.
Lemonade Time – Have a garage sale or bake sale and put your child in charge. With some supervision, preteens may take to this project like a duck to water. They can handle much of the responsibility while learning about setting a value, making decisions, and helping you price the items you sell.
Ages 13 to 15
Stocks are up – A child’s early teen years are not too early to learn about the stock market. You can pretend to invest in companies your child is familiar with, like Disney or Mattel. Make it a family activity by having each member pick a stock, suggests Godfrey. Then read the paper or watch the financial news together, and discuss how the stock values of everyone’s choices fluctuate.
The power of credit – Pre-paid credit cards, such as Visa, are simple tools that parents can offer to teach lessons in financial responsibility. Teenagers can use these buying cards to pay for things without using cash or credit cards. Parents load the cards, which look like credit cards, with a set limit of money and then let their teens budget their allowance. When using your own credit or debit card at a restaurant, take the opportunity to teach children about how credit cards work. Explain the difference between credit and debit cards, how to verify the charges, how to calculate the tip, and how to guard against credit card fraud.
Needs vs wants – Between lunch money, school supplies, and other small necessities, allowance can go very quickly for young teens. Help your child set a budget by first discussing wants vs. needs. You can reinforce this idea by going over the family budget with your child and discussing your family’s needs vs. wants. Share with your child what you would like to buy and what bills have to be paid each pay period.
Ages 16 and up
Easy investing – If your teenager is saving for a big-ticket item, such as a car or college, savings shouldn’t be made by putting dollars bills in his sock drawer. The money should be invested so that he’ll be able to reach his savings goal quicker. For example, if your 16-year-old wants a tablet that costs $100, he should know that if he puts $5 a week toward this wish, it will take him 20 weeks (or about five months) to reach his goal.
Money Decisions – Allow teens to make their own spending decisions. Whether good or poor, they will learn from their spending choices. You can then initiate an open discussion of spending pros and cons before more spending takes place. Encourage them to use common sense when buying. This means doing research before making major purchases, waiting for the right time to buy, and using the “spending-by-choice” technique. This technique involves selecting at least three other things the money could be spent on setting aside money for one of the items, and then making a choice of which item to purchase.
Loan shark – Alert teens to the dangers of borrowing and paying interest. If you charge interest on small loans you make to them, they will learn quickly how expensive it is to rent someone else’s money for a specified period of time. For instance, paying for a $499 TV over 18 months at $31.85 a month at 18.8 percent interest means the buyer really pays about $575.
Happy giving – With a little encouragement, giving to charity can become part of your child’s mentality. In fact, donating can be more than a financial lesson; it can teach social responsibility. Help your teen pick five charitable organizations that interest him. To decide which one is worthy of your hard-earned dollar, make it a family project to find out what they do, how well they do it, and what percentage of the donations goes to their cause.
Speak up – Parents must be careful to avoid giving money too much psychological weight. The best way to do that is to speak about money in a rational way. Over time, children who don’t get straight answers tend to think about money in purely symbolic terms, giving it more emotional weight than it deserves. They may end up looking at the world through costs and benefits, rather than social rules of reciprocity. This can limit the ability to develop close relationships that would help people cope with problems in a way money cannot.
One-stop finances – One mistake parents make with financial education is trying to get it done in one go. They enroll children in summer camps or one-semester classes that aim to cover everything from running lemonade stands to bookkeeping to applying for a mortgage. The problem with this approach is that financial knowledge decays over time. Instead of teaching all elements of personal finance at once, “just in time” education gives consumers the knowledge they need just as they are about to engage in a transaction. So, instead of giving information about car loans to students in a textbook, consumers would get the information as they started shopping for cars. Parents can adopt this technique, too. Let’s say you want to teach your child about budgeting, and you know that every year, Aunt Ethel writes your child a $50 check for Christmas. The moment to talk about budgeting is just before that happens. If you have that conversation a few months before or a few months after, it’s not going to have an effect.
Discuss it – If you establish a regular schedule for family discussions about finances at an early age, it can be very beneficial to younger children. Some discussion topics could include the difference between cash, checks, and credit cards; wise spending habits; how to avoid the use of credit; and the advantages of saving and investment growth. With teenagers, it’s also useful to discuss what’s happening with the national and local economies, how to economize at home, and alternatives to spending money. All of this information will be important as they take on more responsibility for their own financial well-being.
Your young one needs to learn to gain control over his money and spending habits. Your child needs to know how to save for the future while spending the balance wisely now. Remember, as with bad habits, good spending habits also last a lifetime.