Managing finances is an important skill we need in order to make sound financial decisions, but when do we actually learn about it? Is it taught in school with a textbook and a lecture? Or perhaps at the grocery store, while carefully counting out change to hand to the cashier. And whose responsibility is it to teach kids how to handle money?
On average, teaching children how to manage finances from a young age will improve their habits as adults. Research shows that money habits and attitudes are formed by the age of seven, so smart money skills should be taught at home as soon as they can understand what money is and how it is used.
If you don’t teach your kids how to manage finances, you run the risk of them picking up poor money habits that may hinder them in the future. Below, we’ll show you how to give your kids a head start when it comes to managing finances and set them up to make smart money decisions at any age.
Should Kids Be Taught to Manage Finances?
According to an online 2021 T. Rowe Price survey of 2023 parents of children ages 8 through 14, 35% of parents don’t like to talk about finances with their kids.
Some feel that they aren’t financially literate enough to pass wisdom onto their kids, while others think that finances should be taught in school. However, teaching money basics isn’t currently mandatory in schools, meaning it’s up to parents to take accountability for teaching financial management to their children.
Children who have more success in managing their finances as they get older tend to have parents who talk to them about money from an early age. The more we are exposed to something, the more comfortable we feel about dealing with it. Having conversations about money helps build confidence around the subject and helps your child develop financial skills.
Taking the time and effort to teach your kids about finances will give them more guidance and help them be more prepared as they enter the world on their own.
How to Explain Where Money Comes From
Most of us have heard the term “money doesn’t grow on trees.” It’s a saying often used to teach kids that money hasn’t to be earned, but it doesn’t explain where the money actually comes from.
To most children, money really does seem to grow on trees. Kids may have curious minds, but they also have a fairly vague understand of home their parents get them items like food, clothes, and the home they live in. When learning about money, they are going to want to understand the who, when, when, why, how, and where, and explaining where it doesn’t come from isn’t giving them a solid answer.
So how exactly do you get your child to understand the value of the money and where it comes from?
Show Them That Money Must Be Earned
When kids are young, they think that money simply comes from mom and dad because, well, it does. Whether it’s the allowance they receive, or money handed over when they want to buy something, you are the ones pulling out your wallets and handing over the cash.
One of the first lessons kids need to learn about money is that it comes from work. You work, you get paid. No work, no pay. This will not only teach kids where the money is come from but the value of work and time as well. Once they understand this, they can start to develop their own ideas for how they’ll acquire money as they get older.
Show Them That Things Cost Money
This is going to take more effort than just saying, “that candy bar cost $1.99,” or “that toy is too expensive.” For kids to really get a grasp on what things cost, they need to be physically involved with the entire process.
Having cash on hand is the best way for your kid to understand what things cost. While it might be more convenient to swipe a card through the machine, being able to count out and physically hand the appropriate amount of money to the cashier.
Tips for Teaching Your Kids About Smart Money Management
As you can imagine, teaching kids of any age about money isn’t the easiest task. A good grasp of financial management is one of the most valuable life skills a person can have, and sheltering kids from financial challenges does them no favors.
Teaching and talking about finances with your kids be feel odd but starting at a young age will make them more comfortable around the concepts of money and yield the best results.
While the following list is certainly not all-inclusive, here are a few tips and lessons you can use to teach your child about money.
Let Your Kids Make Their Own Spending Choices
The idea that money is a limited resource is one that many children struggle to understand. To reinforce this concept, let them make purchases and deal with the consequences of those purchases.
Maybe your kid was saving up to buy the new video game they wanted but decided to spend some of that money on a trip to the movies. Let them know that asking you to cover the remainder of the cost of the video game isn’t an option. This will teach them about saving, money management, and smart decision-making.
Examine Your Own Attitudes and Habits Regarding Money
Kids pick up on our attitudes and habits quickly, and attitudes regarding money are no different. One of the best and most natural ways to teach is to lead by example. Before you start teaching your kid about managing finances, it is important to examine your ways of handling money so that you don’t unintentionally pass on poor habits to your kids.
Take simple steps such as comparing prices while you shop, creating and sticking to a budget, and saying no to impulse buys to demonstrate financial management skills to your children.
Turn Mistakes into Lessons
Whether you’re new to managing finances or consider yourself a budgeting guru, it is human to err, and mistakes are bound to happen. If a trip to the grocery store ends with you straying from the list and grabbing few extra items, use this opportunity to explain how the budget must now be adjusted to compensate for the extra money spent.
Provide Income Opportunities
Kids need to understand that we can’t afford to buy everything that we want and that the things we can afford are determined by our income. While talking about various jobs and salaries is a great way to pass on the knowledge of different trades, careers, and income levels, kids learn best with hands-on experiences.
They need opportunities to earn an income themselves to fully understand the concept of trading time and effort for money. To do this, occasionally offer your kids the opportunity to make a small amount of extra money, then help them decide what they can do with the money they earn.
Teaching the Satisfaction of Giving
While earning, saving and spending are important, so is helping out those who are less fortunate. It’s never too early to start teaching children about the concept of charity and pass on your values through those lessons. Teaching children about giving can help them develop budgeting skills, discover causes they care about and open their eyes to valuable tools that they can use as they get older.
To start, explain to your kids the importance of charity and encourage them to give some of their allowance or other earnings to the less fortunate. Talk to your kid about what they feel strongly about and show them different ways they can help.
Involve Your Kids in Family Financial Planning
Talking to your kids about what you’re doing and involving them in your decision-making process can be a powerful thing. Your household budget affects more than just you, and bring your kids into the conversation can help teach them valuable skills that they will need once they go out into the world on their own.
Find age-appropriate areas of your budget to discuss as a family and ask your kids for input. Things like the weekly grocery budget, extracurricular activities, and planning for the next family vacation are great places to start.
Create a Healthy Attitude Towards Credit
A recent poll found that 27% of children ages 8 through 14 believe that credit cards are free money. Your kid may remember you saying that there isn’t enough money in the budget to buy a certain item, but then see you swipe your credit card to make a large emergency purchase without understanding what it’s all about.
Even if you use credit to pay for expenses, explain to your kids that you are using borrowed money to make the purchase that will then have to be paid back later. Once you are ready to pay the bill, let your kids in on the process. Since most of these processes are online these days, have them sit with you have the computer as you check your balance and pay the bill.
Another way to teach credit is to allow your child to borrow a small amount of extra money from you when they want to make a large purchase. Come up with a plan of how much your child will repay each week, then make sure to collect the money and keep track of the balance until the debt is repaid.
Teaching Kids About Money at Every Age
In a poll that asked parents why they don’t like to talk to their kids about finances, 56% of parents claimed their kids are too young to understand the topic, while 27% of parents think finances should be taught in school. However, this isn’t actually the reality.
Money management skills can be taught as early as the toddler years, and financial topics should be continually discussed as they move closer to adulthood. Kids are eager to learn from their parents, and having a working knowledge of money can help them do well in life.
Toddlers
Research out of Cambridge has found that the golden age for teaching good money habits is between ages zero and seven. By the time a child is seven years old, they have already developed habits and attitudes around money, and those can be hard to reverse later in life.
Involving your toddler in simple tasks like grocery shopping can introduce them to transactions and decision-making early on. Creating a shopping list and sticking to it can also teach your child delayed gratification and help them learn to resist giving into impulses.
Playtime is another great and natural way to introduce your toddler to financial management concepts. Young kids love imaginary play. Playing store can teach your child the basics of commerce and exercise their imagination at the same time.
Preschoolers
Involving your kids with a variety of hands-on experiences will teach them far more than a lecture. The good news is the opportunities for these experiences are endless. Walking through the store, eating out at a restaurant, going to the movie theater—if a transaction is involved, it is an opportunity for a money lesson. Talk your child through what you are doing and why it is necessary.
While eating out at a restaurant is an opportunity to show kids that meals must be paid for, this can be done even better at home. Eating out at a restaurant can be exciting and even overwhelming in some cases, which can make teaching moments stressful. Playing pretend at home promotes a variety of skills, such as table etiquette, customer service, setting the table, and exchanging money for goods and services.
The Power of Reading
Research has shown that kids learn well through the process of reading and being read to. Picking up some fun books to read to your preschooler can introduce them to money concepts in the form of storytelling instead of lectures.
Here are some great picture books that teach money concepts:
- Once Upon a Dime by Nancy Allen
- A Dollar, a Penny, How Much and How Many? By Brian P. Cleary
- Bunny Money by Rosemary Wells
- The Berenstain Bears’ Trouble with Money by Stan Berenstain
- Lemonade in Winter by Emily Jenkins
- You Can’t Buy a Dinosaur with a Dime by Harriet Ziefert
Grade School Kids
Take a trip to the bank and help your child open up their own savings account. Counting and exchanging physical cash are important for younger kids so they have a visual that can help them understand the value of money. Once they grasp that, however, it’s time to move on the banking.
Whether online or in-person, using a bank card to exchange money is part of our everyday lives. This is also a great opportunity to introduce the concepts of savings and interest. Encourage your child to make regular deposits into a savings account and teach them how to keep track of their balance. Many banks have children’s interest-earning savings accounts that offer no monthly fees.
Take Advantage of Technology
In the age of smartphones and tablets, there are plenty of apps available that teach kids about money in fun and interactive ways.
For introducing your child to banking, Bankaroo is a virtual banking app that allows kids to easily track their expenses. It teaches kids the value of money and also motivates them to set goals and save for themselves.
Adventure Capitalist and Peter Pig’s Money Counter teach important money skills like investing and budgeting in the form of a game.
Making financial lessons fun can help children escape the negative mentality many people have around money and motivate them to learn more.
Middle Schoolers
The preteen and tween years are a great time for your child to start learning how to earn money. While there are various schools of thought when it comes to allowance, there are plenty of opportunities for teaching your kids to earn money.
Holding an old-fashioned yard sale is a great way for your child to earn money while experiencing haggling and setting value. This also allows them to take charge of a project and learn decision-making skills with some mild supervision from you.
Understanding ‘Wants’ and ‘Needs’
This is a good time to discuss the differences between wants and needs and teach them basic money lessons. Up until this point, your child probably hasn’t had to add needs into the equation when it comes to money. After all, it’s your responsibility as the parent to provide. However, asking your child to pay for certain expenses will help prepare them for adulthood.
Now, we’re not suggesting you ask your 13-year-old to fork over funds for groceries or rent. Instead, encourage them to identify their wants, then make a plan to cover those expenses. If they want an expensive new pair of shoes or money to go out with friends, ask that those costs come out of their own earnings.
Teens
As your kids reach their teen years, they will be looking for new ways to be independent. Whether they are planning for college, taking a gap year to travel, or jumping right into work out of high school, once they graduate high school, they will move into a phase of being responsible for themselves, which includes financial responsibility.
To help better prepare them to manage their finances in early adulthood, they need firsthand experience with banking and budgeting.
Young Adults
Learning how to handle money isn’t just for kids—it’s a lifelong process. Taxes, credit, and investing are not taught in schools the way they used to be. According to the S&P Global Financial Literacy Survey, 43 percent of adults in the U.S. are financially illiterate.
Whether they are still living at home or have a place of their own, understanding the concepts of credit and investing can help them avoid bad debt and reach their financial goals.
Does Giving Allowance Teach Kids to Manage Finances?
A 2021 survey found that 61% of kids earn some sort of allowance from their parents.
Allowing your kids to earn an allowance has the potential to teach them about money management and budgeting and promotes a sense of responsibility. It also communicates the value of money and teaches kids how to make financial decisions.
How to Create an Allowance System
Allowance can be structured in many ways, and how you do, it is totally up to you. Some are tied to weekly chore completion, while others are given out for extra jobs outside of normal housework. What’s important here is to make sure the allowance is earned, not just given, if you want them to learn the lesson.
Implementing Budgeting to Teach Finance Management Skills
A budget is a plan for where your money is spent every month based on your income and expenses. Learning to budget is a foundational piece of financial planning, and implementing budgeting skills early on can teach your kid to live within their means, save money, avoid debt, and reach financial goals.
Budgeting with your kid can start as early as their toddler years. The simple act of telling them you have a certain amount of money to spend on things like the food at the grocery store can start their budgeting education. Make a note of what each item costs as you load up your cart, then stop shopping once you’ve used up your budget.
As your kids get older, you can get more detailed with the budget and even share other aspects of your household budget, such as utilities, insurance, and entertainment.
Teach Your Kids to Create Their Own Budget Plan
Introduce budgeting by helping your child set up a budget plan of their own. Budgeting isn’t typically taught in school, so helping your child creating a budget will help them prepare for larger household budgeting later in life.
Here are some ideas for what a child can budget for:
- Create a budget plan for a day out. This can be something large, like a day trip up the coast, or as simple as a movie and ice cream close to home.
- Set a goal for a big purchase item, then create a budget plan for how long it will take them to save for that item.
- Create a summer bucket list, then budget out how much each item on the list will cost.
- For older children, have them budget out their monthly social expenses. Allowance and payment from afterschool jobs disappear all too quickly without a plan. Remind them to also put money aside for savings and any essentials they may need, not just wants.
Avoid Impulse Buys
While there’s a lot of psychology behind why we impulse buy, one of these reasons is ingrained in us as children. Kids are often conditioned by their parents to feel good when something new is given to them.
While it’s important to teach your kids to be thankful for the things they have and receive, you’ll want to make sure it’s coming from a place of appreciation and not greed. Saying no to impulse buys teaches kids they can’t have everything they
Talking About Bills with Your Kids
Talking about bills with your kids can give them real-world experience with managing finances and give them a better understanding of your household budget.
While talking about bills, make sure to avoid instilling fear about your family’s finances. You want your child to feel secure and stable in your home. If bills are making you anxious, talk with your kids about why that is and explain the positive actions you are taking to fix the problem.
Helping Your Kids Understand the Importance of an Emergency Fund
An emergency fund is a stockpile of money set aside for a rainy day. If you incur unexpected medical expenses, lose your job, or have car troubles, an emergency fund is there to help.
Most experts believe you should have enough money in your emergency fund to cover at least 3 to 6 months’ worth of living expenses, yet about 40% of those in the U.S. don’t have enough saved to cover $400 worth of emergency expenses.
A survey that asked parents about the state of their emergency fund after the 2020 pandemic found that 44% said that they need to increase the size of their emergency fun because it was not enough to sustain. In that same survey, only 28% of parents claimed to have frequent talks with their children about the importance of saving for emergencies.
The sooner you start teaching your kids about the importance of developing a financial plan and sticking to it, the earlier they’ll be able to start creating a comfortable emergency fund and prepare for the unexpected.
Final Thoughts
Money is central to everyday life. What we eat, where we live, education, healthcare, entertainment, the clothes we wear, transportation—you name it, money is likely involved.
Having a working knowledge of money plays a huge role in how well we do in life. If you aren’t teaching your kids to manage finances, they’re going to pick up lessons about money one way or another, and they may not benefit from the result.
Sources:
T. Rowe Price’s 13th Annual Parents, Kids, & Money Survey