By the time they graduate high school, many children learn everything they know about money by observing their parents. Personal finance is completely absent in most K-12 school curricula, so if parents don't teach their kids good financial habits, who will? Unfortunately, the subject of money is taboo is many households. Yet, the benefits of teaching your kids about finances and helping them develop a healthy relationship with money can literally pay off for the rest of their lives. If you're not sure how to begin the conversation, our tips for raising financially savvy kids can help.
Lead by example
The following discussion suggests a number of the ways you may wish to approach your child's "real world" financial education. Depending on your family dynamic and financial situation, the tips and strategies below may require modifications. However you decide to teach your family about money, remember to lead by example. Even if you never explicitly teach the merits of saving and living within your means, your own behaviors and attitudes towards money will not go unnoticed.
Young kids need to learn about money, too
There's a misconception that you need to wait until your kids are in middle or high school before you can teach them financial topics. In fact, if you start incorporating financial lessons into your home life when your children are young, there's a much better chance it will stick as they get older. With young children, start with the basics and build from there.
Lessons at the grocery store
The grocery store can be a great place to teach young kids about money. For example, give them a budget; say $5, to pick out whatever they would like to get during the shopping trip. They can get whatever they want, as long as they don't go over $5. Encourage them to look at sale prices and think strategically about what to pick each week. This can help kids with their math skills, their ability to evaluate trade-offs, and help foster an understanding of what it means to stay within a budget.
As they get the hang of it, you can complicate the "game" a bit by offering to double the budget this week, and make next week's budget $0. Is it worth it to buy in bulk? Are the higher-priced goodies worth potentially going without their favorite treats the following week? You may also wish to let your child dip into his or her allowance if their selection is over-budget. This can help kids get more comfortable with the idea of attaching a dollar value to their wants and needs, and when a purchase may be worth dipping into their savings for.
Use the "why" questions to your advantage
Some kids just love to ask "why?" Take some of those moments as a learning opportunity. Here's how this can work:
You'll decide how far down the "why" rabbit hole you want to go, but you get the idea. For young children, it the goal is to introduce them to concepts like work, money, saving, and broad-based financial goals. This can help lay the foundation for lessons in the future.
An allowance can be a great teacher - as long as it's not free
If you're giving your child an allowance just for breathing, you're doing them a disservice and missing out on a fantastic education opportunity. Rather than give a hand out, introduce your children to the relationship between work and money. Consider giving your children a set list of baseline chores or household tasks (depending on their age), that they need to complete each week to earn their "salary" allowance. Then, consider offering an additional list each week of optional chores they can choose to perform, and attach different dollar values to the successful completion of each task.
This can help them think about evaluating their time and effort with potential earnings. The correlation between working harder and earning more won't be lost on them.
When your child is young, give them their allowance in dollars and coins. It is important that they actually see the value of money when they earn it and truly understand what it means to spend it. Keeping their “earnings” in a clear container like a jam jar lets them plainly see the money building up, and may make them less likely to empty the bank. Credit cards and other technologies like Venmo make it easier to turn a blind eye to spending. However, as they get older, transitioning to these forms of currency and payment will become an important part of their education.
Financial education for kids in middle school or junior high
When kids are a bit older, you may want to get them involved in more advanced financial decisions. Ideally, you will want to focus on situations where a financial decision has a big impact on their life. Although it is worthwhile to bring them along when you're shopping for a new car or household appliance, they may not be terribly vested in the outcome. Instead, focus on purchases or events of more significance: extra-curricular activities, an overnight school trip, a clothing budget, and so on.
Skin in the game
How exactly you wish to handle these expenses will again be up to you and your family, but there can be a great benefit to teaching your kids about having "skin in the game" at this age. Depending on your family's financial situation, it may simply not be possible for them to have "everything" they want. This is an age of intense peer-pressure, so it worth emphasizing that throughout life, there will always be someone who has better stuff than you do – newer clothes, fancy car, huge house – so learning to accept what is realistic is a key life skill. Remember, even absent financial constraints, there are benefits to involving your child in the conversation and the decision-making process. Set a firm budget and let him or her decide which activity or purchase is the priority.
Taking the conversation big picture can really help put things into perspective, also. The concept that "you can only spend a dollar once" could be introduced to children this age. Ideally, your middle-schooler will begin thinking along the lines of, "If I don't go to the movies this month, I'll have enough to buy that hat I want" or "I'm going to start babysitting this summer so I can have extra money to spend it how I want."
At this age, it may be beneficial for your child to have their own savings account, which you can help them open at a local bank. Although it may be early for a checking account with a debit card, consider paying your child his or her allowance on a prepaid credit card.
Financial lessons for high school kids
As your children become young adults, there are no shortage of opportunities to teach healthy financial habits. A summer job can be one of the best ways for young adults to gain exposure to the financial system they will rely on as adults. Having a job can help high school kids better understand the value of a dollar. Working can allow kids to have an anchor when considering a purchase. For example, a $75 clothing item can be associated with a day's work. A part-time job can also help teach kids about our tax system and the value of a college education.
Perhaps the biggest lesson for high school kids will be discussions about college. Regardless of your college funding goals as a parent, your child should understand and appreciate how their school choice may impact the family's financials. One of the best ways to teach your teens about working hard and being financially responsible is for them to have skin in the game.
Contributing to their college education can take many forms. Perhaps they take out a small amount of loans, find a part-time job or work-study program, or agree to pay for some of the interest while in school. As acceptance letters come in, help them weigh the various financial aid packages. For example, one school may offer a generous scholarship while a comparable school which the child might think she prefers does not. If they opt to forgo the scholarship, let them know they need to borrow the same amount to attend the school of their choice. Having a financial stake in their education can help many students remain focused and appreciative of the opportunity while in college.
If you do take on loans for college, either in the student's name or as parent Plus loans, involve your son or daughter in the calculations for expected monthly payments and interest rates. This is especially important if your teenager will be responsible for making the payments after graduation.
Getting involved in the financial system
At this age, it may be a good idea to help your child begin to use a credit card. You may prefer to have them use one of yours, or co-sign the application for a new credit card in their name, preferably with a low limit. Either way, try to avoid a situation where your child spends freely and you foot the bill. Set limits for the credit card and review the transactions. Allowing him or her to spend freely will send the wrong message about how to responsibly use credit cards and the concept of leverage. Stress the importance of paying off the balances on time and before they grow too large – ideally in full every month. This lets them learn about interest charges, and how credit scores work. Since this may require parental supervision, it is best to have these conversations before your child goes off to college.
If you have not done so already, help your child set up their own checking and savings account. If they want to make purchases with a debit card, monitor their activity to ensure they're not over-withdrawn.
Learning about credit
Having access to both a credit and debit card also gives you the opportunity to educate your son or daughter about the pros and cons of using credit or debit for purchases and how a good credit score can impact their future goals. For example, if you wish to buy your child a car or help them with the purchase, consider having the student work up an analysis on the pros and cons or financing the car versus paying cash. You probably already know how you plan to pay for the car, but the exercise can be a great learning experience for your teen.
Personal finance for college students and beyond
Each family is different. Some college-aged kids may be largely financially independent, although most of them will still rely on Mom and Dad. As your teen or twenty-something further progresses into adulthood, consider taking an active involvement in their ongoing financial education. Before long they will be evaluating different job offers, looking for an apartment, and trying to become financially independent for the first time. After all, they don't know what they don't know, so the extent that they'll let you help, share some of the financial wisdom you learned along the way.
Starting to invest
In college, students taking finance classes may learn about the capital asset pricing model (CAPM) or the intrinsic value of a stock. While relevant to someone pursuing a career in investments, it doesn't necessarily help young professionals with every day "real world" financial decisions and opportunities. If you're working with a financial advisor, ask to bring your college student or young professional in for a meeting. It may be advantageous for them to get started investing income from a part-time job in a Roth IRA or perhaps they have questions about what to do with their 401(k) plan.
The best ways to build wealth and achieve financial independence
The world is changing very quickly, and technology continues to play a large role. Today, kids can send money to each other instantly though apps like Venmo or Snapchat. While we don't know what disruptive technology will change the way we do things in the future, it doesn't mean that those advances should disrupt prudent investment strategies. If you see your grown children getting distracted by trendy investments like Bitcoin or the latest tech IPO, consider having an adult conversation about the best ways to build wealth over the long-term and the importance of diversification.
Talk about your estate plan
Perhaps the one topic families tend to avoid talking about even more than money, is estate planning. And understandably so; contemplating our own mortality isn't high on anyone's to-do list. However, not talking about it at all, particularly if you have named one of your adult children as executor of your estate, could be a big misstep.
Discussing your estate plan doesn't mean you need to tell junior how much he stands to inherit. Depending on the family dynamics, it may or may not be appropriate to get into the specifics. The critical facts to relay are more broad-based, such as: where are documents are located, the name of the attorney who drafted the estate plan, who has been named trustee and executor of the estate, if you've named a power of attorney or healthcare proxy.
It isn't always advisable to name your adult children executor of your estate or trustee. It can be a lot of work and lead to bitter family disputes. Regardless of how you wish to handle your estate, it's important for your children to be informed enough to know how to respond if something were to happen.
It's true that sometimes the best way we'll learn is by giving something a shot ourselves, and learning from the success or failure that follows. While every parent will have to decide when to let their kids make mistakes and when to use a situation as a teaching moment, laying the groundwork for a financial education is sure to help your kids succeed in gaining financial independence in the long run.