As a parent, you choose who is teaching your child about money. You can teach them about money or leave it up to the world to do it. This is your chance to instill the values that you hold dear in your children so they can continue on the legacy.
The University of Cambridge has found that children’s fundamental habits later on in life as adults are formed by the age of 7! Starting financial education early in your child’s life, even if you don’t feel like they are old enough to understand, will build life-changing habits.
How to Explain the Importance of Money to Your Kids
Choose life lessons to share that are age-appropriate and lay a foundation. Make learning fun and use repetition to build on consistency so money management becomes a habit that is easily repeated naturally as the child grows.
Habits that become second nature are less likely to be broken later in life. One example is teaching a child to save a percentage of their income from a young age. As they grow, it’s natural to set up an auto-draft to save from the paycheck of their first job and not spend the money on impulse buys.
Smart Money Habits to Introduce to Kids
Many parents are scared of doing something wrong when teaching kids about money. This is a common fear, and your child is relying on you to start the conversation.
The University of Wisconsin-Madison studied behaviors and attitudes in 4th and 5th-grade students that had been exposed as youngsters to financial education and found “younger students can learn financial topics and that learning is associated with improved attitudes and behaviors which, if sustained, may result in increased financial capability later in life.”
Preschool & Kindergarten: Age 3-5
- Set up 3 clear jars for each child with labels for Saving, Spending, and Giving. Clear jars give the child a visual and they can watch the amount grow every time they add to it. Many financial professionals believe that 10% of money received by a child should go to Giving and then split the remaining money between Saving and Spending.
- Encourage responsible spending. Some children become so responsible with their money and so engaged with watching the money grow in their jars that they don’t want to spend their money. At all. Use this as a chance to set a healthy example for them of how to have a positive relationship with money.
- Pay with cash in front of them. When we use a credit or debit card for every purchase, a child just sees a card being used and it can come off as magic. By paying with cash, this presents an opportunity to show a child that money is a resource that is used in transactions and you can run out of money if you aren’t careful. If they know how to count, let them pay for the item and count out how much is needed to buy it and then how much change they have received back from the purchase.
Elementary School: Age 6-10
- Set up an allowance system. This is a consistent amount of money given to a child on a regular basis that the child can decide what to do with. Help the child create a budget.
- Show them what “opportunity cost” is. Pick up an item off the shelf at the store and show it to your child then explain what the price is to buy it. Take it one step further and explain how many chores they would have to do in order to buy the item. An example is that a toy they want is $20 and they make $5 every time they clean up after the dog. Therefore, the opportunity cost is 4 times of cleaning up after the dog in order to buy the toy.
- Address impulse buying. We have all seen the child in the store that asks for every new toy they see and the parent that indulges the child with impulse buys. This parent believes that they are showing love but the reality is that this is teaching the child negative money habits by encouraging impulse buying.
What Not to Teach About Money
Avoid teaching children that the amount of money a household receives comes only from jobs. Expand their mindset to include side hustles or entrepreneurship as a way to bring in extra money. Help them create opportunities for themselves as they grow.
Children listen to every word we say, so be mindful of that. Don’t teach them that money is bad accidentally by saying things like “Money doesn’t grow on trees” or “We can’t afford that.” Teach them how to make it happen instead of discouraging their efforts from childhood.
Don’t teach irresponsibility through mismanaging your own finances. The “Treat Yourself” movement sweeping the country encourages negative money habits. Teach your children that self-care is important, but teach them to budget their money in a way that includes self-care in the budget. Include self-care in your own budget and model that behavior.
At this age, teaching children about debit and credit is not the best idea and is not age-appropriate. This is a subject that is addressed with middle schoolers and teens.
How to Set a Good Example for Money Management
The best lesson that we can convey to the children in our lives is by leading through example. Your children will model their behavior after yours because they love you and respect you. You are their role model.
Allow children to have access to money of their own and make decisions for their money. It’s ok to let children make mistakes because that’s how they learn. Let them know that it’s ok to make mistakes and that you will always be there to guide them or bounce ideas off.
Take the child to the store with you and explain how much you have budgeted for groceries, clothes, household goods, etc. Let them help you choose items that stay within budget.
Consider letting the child plan a meal for the family and give them a budget to do it with. Show them the difference in price between generic and name-brand items. Next, show them the unit cost of an item and how to determine which option is the best choice for your family based on quality and price.
Common Money Definitions
Let’s discuss the terms used in this article and make sure we are all on the same page.
- Savings: This is a store of value that is set aside and not invested. In our example, savings was set aside in a clear jar.
- Giving: This is money that is given to a charitable institution or someone that the child knows personally. Our example included having a separate clear jar for giving to others.
- Spending: This is money that children are encouraged to spend on items that they want at a store under direct supervision of a responsible adult. This is the third jar set aside in our example.
- Opportunity Cost: This is the exchange of time for money and money for an item. Essentially, we are teaching children what they need to give up in order to get what they want.
- Commissions: This is the recommended way to pay children for completing chores because it instills in kids a good work ethic and healthy relationship with earning money.
- Allowance: This is the method not recommended to give money to children. An allowance is money expected by a child regardless of when or if they perform work.
- Habits: These are small decisions made every day consistently until they become routine.
Best Books to Read for Teaching Positive Money Habits
Here are some of our favorite books. Check out our kids’ money books library for more recommendations!
Smart Money, Smart Kids By Dave Ramsey and Rachel Cruze. This book aims to raise the next generation in the way they should go from day 1. Dave and Rachel cover the basics like working, saving, spending, giving, paying for college, and being content with what you have.
Make Your Kid a Money Genius (Even If You’re Not) By Beth Kobliner. This book breaks down money concepts in ways that children can understand and that parents want to teach to their kids.
Sammy Rabbit By Sam X Renick. This series teaches children about money, setting goals, planning, and significant life skills. This is a series of multiple resources.
Money Math: Addition and Subtraction By David A Adler. This book can be read with children to teach what money is and how it’s used in modern society.
Arthur’s Funny Money By Lillian Hoban. This book is timeless advice on simple business ideas, advertising, and overhead of businesses while teaching basic counting principles.
Teaching children about money at any age will give them a huge head start in life and give parents the ability to establish themselves as an authority on money in their kids’ minds. Who doesn’t want to be the hero to their child and have them look up to you? Having fun with children while learning is instrumental in cementing lifelong money habits in your kids’ minds.
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