As parents, you teach your kids thousands of lessons over their childhoods. You teach them to spell their names, to eat their vegetables and not to talk to most strangers. You teach them that it’s important to say you’re sorry when you’re wrong. And it’s up to you to teach kids about money—how to earn it, how to save it, and how to spend it.
Kids will learn plenty about money just by watching how you use your credit cards, but they won’t necessarily learn the right lessons. I recommend taking a much more proactive approach to encouraging financial literacy in your kids. Teaching them about responsible money management is one of the greatest gifts a parent can give their child. Every family is different, so naturally, what you decide to teach your kids will depend on your own experiences. These are just some of the key lessons I suggest you teach your kids about money.
Lessons to Teach Preschoolers About Money
Young children need to master the concepts of saving and earning, and understand where money comes from, to build a strong foundation of financial literacy. Kids who are between 3 and 6 should learn that:
• Money is finite and has to be earned. Little kids see a parent take cash out of an ATM and believe there’s an infinite supply where that came from. Even once they’ve grasped the concept behind a bank account and debit card, kids may not make the connection between work and money. Parents can instill this lesson when talking to their kids about their jobs; “I have to do my work on the computer in my office because it’s how I earn money to pay for what we need.” Offering a weekly allowance in exchange for doing certain chores is a great way to give kids real-world experience with earning money for work. You can even start teaching the value of the money they earn by making them responsible for certain items in their life. It will show that we have to make decisions about what we really want.
• Want and need are different things. This lesson goes hand-in-hand with teaching kids that money is finite. Using cash while grocery shopping with kids is one simple way to illustrate the difference between want and need. Show kids how much cash you have and talk about all the things you need to buy, then track the prices of everything that goes into the cart. When kids ask for special snacks or toys, talk about how buying one of those extras would mean going without something that you need.
• It’s smart to save your money. Setting a kid up with a clear piggy bank is one simple way to reinforce the lesson that saving at least some of your money is important. Help a child set a savings goal, then celebrate together every time they add more money to the piggy bank and get a little closer to that goal. You can also start talking about how money that you save in a bank account actually grows because of interest.
Lessons to Teach School-age Kids About Money
Once they’ve mastered the basics of earning and saving, kids are ready to learn about money and consequences. Kids who are elementary- and middle-school age should learn that:
• Making and sticking to a budget is important for everyone. Parents can teach budgeting by talking with kids about how they’d like to divide up any money they earn. How much will go into savings, and how much will be free for spending? Simple budgeting apps will help young kids track their money in a visually engaging way.
• Money grows over time. One of the most valuable lessons you can teach kids about money is that it needs time to grow. Talk about the ways that you have invested your own money. Explain how interest is basically free money that you can earn by being patient and letting your money accumulate instead of spending it. A concept like compound interest can be tough to illustrate to kids. There are plenty of resources online, including simple YouTube videos, that explain compound interest in kid-friendly terms.
Lessons to Teach Teens and Young Adults About Money
Once a teen is old enough to work, it’s time to pivot to lessons that will support their long term financial goals. High schoolers and young adults can learn that:
• Not all financial accounts are created equal. What’s the difference between a savings and checking account? What’s a 529 plan—and does your child have one? What kinds of accounts do people use to save money for retirement? Once they start working, young adults should understand these account options.
• Credit has pros and cons. A lot of young people have gotten the message that using credit cards can get them into trouble if they spend unwisely. This is a lesson to reinforce to your kids—but it’s equally important to stress that credit can also be a powerful tool. The takeaway: Compare credit cards to find low interest rates, and only spend with credit cards if you can afford to pay off the balance each month.
• Tax planning starts when work starts. Do you remember the excitement of opening your first paycheck, followed by the shock at how much had been taken out? Teens should know about FICA, and the difference between net and gross pay, before they collect that first check. Talk about tax brackets and how to comply with the IRS at tax time.
• Money mistakes can take years to undo. If you’ve learned a money mistake the hard way, I know that you want to prevent your kids from learning those same tough lessons. Some parents may want to share their own stories of credit card debt or bankruptcy to illustrate the lasting effects of poor money management. Talk about ways in which their credit score and credit report will be relevant throughout their life. For young adults considering taking out student loans, talk about how to weigh earning potential against future loan debt to make sure kids are thinking realistically about what they’re taking on.
I know that raising kids who are financially responsible might seem daunting at times. Because of Sachetta Callahan’s holistic approach to wealth management, we’re always thinking about your family when helping you plan for life’s road ahead. Reach out if we can be of use to you while you’re teaching your kids about money. Contact us today!
Eric Sachetta, ChFC®, CFP® has been advising clients for life’s road ahead at Sachetta Callahan since he joined the team in 2016. Due to his dedication to the firm and to our clients, Eric committed to the firm by becoming a shareholder in 2019.