Financial Whiz Kids

Teach your kids about money to help them become financially responsible adults

You have a lot of important jobs as a parent. You likely strive to provide a loving, safe, nurturing environment; teach your children values and manners; and help them grow and learn. Perhaps your most important and overarching job, though, is to prepare your children to live independently in the world. That’s right—someday your children will leave the nest and it’s up to you to make sure they’re ready.

Raising your kids to be financially responsible sets them up for a lifetime of success. If you want your kids to turn into responsible adults, start now. Teaching your kids about money now will make all the difference later. Here’s how:

Give your kids an allowance

There are a lot of different theories about allowances, but most experts agree that an allowance is an excellent learning tool. Some experts advocate tying an allowance to chores—i.e. the allowance must be earned; others strongly argue against this—saying that an allowance should strictly be a tool for learning about money and that chores, on the other hand, are simply a non-negotiable requirement of being part of a family and should not be equated with money. After all, does anyone pay you to empty the dishwasher? Regardless of where you fall on this spectrum, the bottom line is that an allowance is a good idea if you want to raise financially savvy kids.

How much should you give and how often? That depends on your child’s age. Younger kids should get a monthly allowance, whereas older kids might benefit from a weekly allowance. A four-year-old might get four dollars per month, whereas a 12-year old might get 12 dollars per week. Use your judgment and find a system that suits your family. Most experts agree that once kids hit the age of 16, allowance should be discontinued in order to provide incentive for them to earn their own money.

If you decide to give your child an allowance, be sure to provide guidelines and be clear that once the money is gone, it’s gone until the next allowance. One of the best ways for kids to learn how quickly money runs out is to let them burn through their allowance and then experience the moneyless waiting period until the next one rolls around.

Set up a bank account for your child

The best way to teach independence is to provide some independence. Set your child up with his/her own bank account and teach the benefits of earning interest. If you want to raise a saver, start the habit early. Help your child set goals and save for them. Some parents like to use the save-give-spend system, which entails dividing any “income” (allowance, earned, or gifts) among those three categories. This provides a balance and allows kids to enjoy the pleasure of spending, while still saving. It also teaches generosity by providing kids with an opportunity to give to the charities of their choice.

As kids get older, start teaching them how to write checks and reconcile their bank accounts.

Use cash

Allow and encourage your children to carry cash. Cash is tangible. They can count it and they can watch it disappear when they spend it (or worse—lose it). In order to learn about money, kids need to see it tangibly. Credit cards and debit cards allow us to disassociate from money and overspend. Teach your kids to maintain a cash existence and you’re setting them up for a debt-free future.

Teach budgets

A budget might seem like a tough concept for kids, but it’s an important life skill and one you should teach early. Start with something small, like a budget for lunch money. Help your children create a minimum budget for school lunch for a month and provide the money up front. If they overspend and run out of money before the end of the month, they’ll have to make lunch for the remaining days. If, on the other hand, they have money left over at the end of the month, it’s theirs to spend as they please.

As kids get older, involve them in your monthly budget planning. Kids benefit from seeing where the money goes each month.

Failing to teach your children how to budget could mean they end up living paycheck-to-paycheck as adults.

Encourage Work

Teach kids how to earn money from an early age. Small, age-appropriate jobs provide income—but they also teach independence and responsibility. Encourage your kids to earn money by delivering newspapers, babysitting, mowing lawns, shoveling walks, or any number of odd jobs. When kids have to work hard to earn money, they learn to be more cautious about spending it.

Charge Interest

Face it—sometimes we loan our kids money. They beg and plead and carry on about how much they need the latest video game or gadget and they haven’t quite saved enough allowance to get it yet. If you let your children borrow against future allowance payments, charge them interest. It may seem harsh, but it is a real-world example of money management and an excellent “teachable moment.” By charging interest, you’re providing a financial lesson and a math problem all at once. They’ll be less likely to borrow in the future once they learn the cost of interest. Believe it—charging interest is a great way to reform your spender into a saver.

Practice and role-play

Money can be a complicated, abstract concept for kids. Don’t expect them to understand the nuances of money without a lot of practice. Role-play with your kids to help them understand what will happen if they overspend. For example: “If you run out of lunch money with four schooldays left in the month, you will have to get up early those four mornings and make yourself a lunch to take to school.” Sometimes when kids know the outcome ahead of time, it prevents them from making mistakes—but not always. And that’s okay. You want your kids to make financial mistakes now while the stakes are low. Learning from these mistakes is what will set them up to be financially savvy adults.