Think about how your child experiences money. She may have a piggy bank, and be saving up her dollars and quarters for a toy. But does she understand how to create a budget? Does she understand the effort it takes to earn a dollar?
Many parents avoid talking to their kids about money, a possible side effect of our society’s belief that discussing money is impolite, says Neale Godfrey, chairwoman of the Children’s Financial Network, author and financial literacy expert. “The only things kids ever see us do with money is spend. They don’t see us pay bills, give to charity or save,” says Godfrey.
The danger, she says,is that we’re raising a financially illiterate generation. The solution, however, is staring us in the face: “Get the kids involved!” says Godfrey. She explains why talking about money with your kids is so important—and how to do it right.
Talk about Money (Really!)
“There’s no way for us to expect our kids to be financially literate if we keep them out of the topic totally,” says Godfrey. If you avoid talking about money, she says, they will learn about it eventually—just not from you, and perhaps not until they hit financial trouble.
“Explain that when you use the credit card, you pay for it at the end of the month. Show them the electric bill. Empower them to come up with ways to reduce it,” Godfrey says. “Explain that there’s a real cost if we open the windows when the heat is on. Kids don’t know that.” By demystifying your household expenses and daily financial practices, you’re teaching them good money habits.
Learning Earning
When your kids are very young, Godfrey recommends introducing the idea that the only way to get money is to earn it. “Set up a very simple allowance system,” she says. Kids should do chores to contribute to the overall household work and not be paid for them. Beyond that, you can designate chores that will earn the kids money.
Create Budgets and Goals
Just like adults, kids should budget their earnings. Part can be spent right away, while part goes to charity and the rest is given over to medium- and long-term savings goals. “Get the kids understanding at a young age that you don’t spend all the money you get,” Godfrey says. Rather than making them feel deprived, your children will learn the satisfaction of earning and saving. “Kids love the system because it’s empowering,” she says.
For long-term goals, Godfrey says you should introduce a 401(k)-style matching program. Say your daughter has her eye on a new bike. “You don’t want the kid to be 43 before she gets the bike,” says Godfrey. For every dollar she saves, add a dollar to her account. And make sure other family members are on board with the system. No bailouts from Grandma and Grandpa!
Teach the Value of a Dollar
Learning about money can be fun. Godfrey recommends using games and hands-on experiences to teach financial concepts. “Make the world your classroom,” she says. When your kids are little, let them go up and down the aisles of the grocery store with a list of items and a set amount of money to spend, to help them learn what things cost.
When they get older, Godfrey recommends teaching relative value. For example, set up a high-end purchase in terms of what it will take to earn the amount of money needed. Say your son wants a pair of designer jeans: Ask him how many weeks it will take him to earn the $150 needed for the purchase, Godfrey says. If it’s 10 weeks, now pose the question: Is it worth 10 weeks of work to buy the jeans? In that way, “there’s no value judgment on the jeans. It’s just: Is it worth it?” says Godfrey.
Share Your Financial Goals, Too
You should also clue your kids into your long-term financial goals, says Godfrey, whether those are saving up for a new home, taking a luxurious vacation or retiring. Even when her kids were very young, she says, she would let them know that she was saving for their future college educations.
Start Debit and Credit Cards with Training Wheels
Kids should be taught the basics of good credit practices—don’t have too many cards, and always pay off your balance every month—as well as why a credit score is so important (and the effect bad credit can have on your life).
By the time they are in their early teens, kids can start spending, Godfrey says. Create, for example, a quarterly clothing budget with your teenager. Then load a debit card with the funds. Your child will have agency over the budgeting and spending—but also can’t dig too deep of a hole if they don’t use the card responsibly.
Godfrey recommends a similar strategy for college kids. Load up a debit card with monthly expenses—not the full semester’s expenses—then have your college-age kid pay their own monthly bills. Once they’ve shown they can handle the responsibility, you can help them open credit cards.
Learn Their Spending Style
“We are all born with a financial personality,” Godfrey says. “You’re a saver or spender.” In Godfrey’s experience, a family can—and most often does—have a mix of financial personalities. So you may be a religious saver and end up with a little shopaholic for a child. Help your kids balance out their instincts, so they save smartly and spend wisely: “Balancing saving and spending, and to be joyful when you do save and reach your goal.”
Julie Anne Russell is a Brooklyn-based freelance journalist. She writes on personal finance, small business, travel and more.
Learn more about kids and money with the 4 Steps to Raising Financially Savvy Kids.