When it comes to advice on how to teach your kids about money,
it’s hard to sort through the not-so-great stuff to get to the “oh,
that’s helpful!” parts.
It’s unfortunate because experts say that it’s important to broach
the subject of money with kids at a young age, but studies show
that parents are more comfortable discussing bullying, drugs
and smoking than family finances or investing.
“There’s no way to expect a child at any age to understand
money unless you talk about it,” says Neale Godfrey, author of
“Money Doesn’t Grow on Trees: A Parent’s Guide to Raising
Financially Responsible Children.”
So what should you talk about? Godfrey walks us through what
she thinks are the five most important financial conversations to
have with your kid.
Teaching children the importance of hard work is part of what
Godfrey calls the “no entitlement program.”
“It’s about raising kids who understand money doesn’t grow on
trees,” she says. You’ll know your child is ready to learn what it
means to have a job when she starts nagging for money to buy
things. “Once your kid recognizes that you’re using money to
make purchases, usually around 3 years old, it’s time to teach
her where that money comes from,” adds Godfrey.
Best Approach: Discuss how you picked your career, and what
you do at work–and then ask her what she might like to be when
she’s older. Consider also paying your kid extra cash, beyond
her allowance, for tasks that she accomplishes related to that
career. For example, if she wants to be a veterinarian, put her in
charge of walking, bathing and feeding the dog, and pay her
slightly extra for the tasks.
A lot of parents forget to explain to their kids what they’re supposed to
do with money once it’s earned. “When you’re a child, and you’re given a
lump sum of money, if no one teaches you what to do with it, you’ll
grow up thinking it’s all meant to be spent,” says Godfrey.
Best Approach: Children as young as three can start receiving an
allowance, and with that allowance comes the idea of budgeting and
saving. Godfrey suggests using four clear jars (the visual aspect is
important for kids), and sitting down on allowance day with the jars to
divvy up the money into 10% for charity, 30% for quick cash, 30% for
savings to be used in the next couple of years and 30% for long-term
“When you’re at the store, have your kid point out items that she wants,”
says Godfrey. “For less expensive things, tell her that she can pay for
those out of her “quick cash,” but for more expensive items–like a bike
or a video game system–she’ll need to save up for them using her “long-
term savings” jar.”
If your kid has allowance jars, he’ll know that part of
his money has to go toward charity. Now you just
need to pick the charity–and make it a habit.
Best Approach: Giving back is an important part of
life, but the concept may take some getting used for
small kids. “The easiest way to help your kid
understand why it’s so important is to first involve
him in ways that he can see how he’s making a
difference, like helping at the food bank or sorting
through clothes for the homeless,” says Godfrey. As
he gets older, search through Charity Navigator
together to find an organization that interests him,
and make donating to that organization a regular
routine on allowance day or at the end of the month.
1. Checking and Savings: Set your kid up with a savings account around the age of
five. (Learn more about the ins and outs of opening a custodial savings account
for your kid.) Even though most banking is done online these days, it’s important
to physically take him to the bank, so he can see where his money is going–and
that it’s in good hands.
Once he’s opened a checking and savings account, pay your child his allowance in
check form, and go to the bank together to deposit it. Then open an online
account together, which you can monitor, and explain how online banking works.
You can even reserve his savings account for different categories–charity,
medium-term savings or long-term savings–so he can get the satisfaction of
watching the numbers go up with each deposit.
2. Credit Cards: Once your kid proves that he can manage the basics–he’s held a
summer job successfully, saved up a certain amount in his savings account, has
never overdrawn his checking account–set him up with a pre-paid credit card,
ideally around the time that he’s set to leave for college or take a full-time job.
Pre-paid cards are good because they work like regular credit cards, but your
child won’t be able to accrue debt, since these cards have a set spending limit.
Explain to your child that everyone has taxes taken out of their
paychecks to keep things running smoothly in the country. Tell
him that the salary he sets up for himself for his job–mowing the
lawn, doing household chores–isn’t the same amount that he’ll
be getting in his take-home pay.
Best Approach: Starting at age 10, put your kid in a 15% tax
bracket and have him deduct that money from his allowance into
the family tax jar, suggests Godfrey. “Of course, you’ll need to
explain that, in real life, this money goes towards things like
keeping our roads clean and safe, but at home, your family can
vote on a quarterly basis how to use the tax money,” says
Godfrey. “This will help avoid the freak out later when he gets his
first paycheck and he’s like, ‘Who’s FICA, and why is he taking
money out of my salary?’”