- Encourage good habits in children in age-appropriate ways.
- Money lessons can start as early as age 3 with a small, regular allowance.
- As children get older, reward good choices to reinforce your lessons.
Will your children be smart about money? The answer depends a lot on you.
Many people get their money values from their parents. That’s why it can be important for parents to teach by example, and talk with their kids about money at an early age. "Handing children money without showing them what to do with it can set them up for bigger money mistakes later in life," says Ann Dowd, CFP®, a vice president at Fidelity.
It is possible to instill smart money values in children starting at a young age. Here are some strategies for each stage of a child’s development that can help you raise a money-smart child.
Ages 3 to 6: Make saving a visual experience
You may think that teaching money values to a 3-year-old child is an exercise in futility, but experts suggest otherwise. The more you can "show" children things related to money, the more they will absorb. "It's very difficult for young children to delay gratification," says Ian Gotlib, David Starr Jordan professor of psychology at Stanford University. "So you have to be creative about teaching them to save. The key is to make saving visual and very concrete."
Young children can understand having a goal and making progress toward it—as long as they can see it happen. You might begin by giving them a small, regular allowance. Giving children an allowance can help teach them to manage their own money. But, it depends on how and when you do it. "If you give a young child a dollar and then walk away, you've taught her that she'll get the money handed to her for nothing," Gotlib says.
Instead, ask what they want to do with the money. With young children, consider having them put the money in a piggybank, where they can see it accumulate, or let them use it to buy something. That way they can start to understand, in a broad sense, that money can get them what they want. "Those principles can help build a foundation for more serious saving later on," Gotlib says.
Eye on the prize
Another idea is to use a clear jar for saving, with a line marked on the side, and tell your child to fill the jar up to that line with their own money in order to get a specific toy. Better still, put a picture of the toy on the jar as an incentive. Each time your child puts money in the jar, he or she can see the progress toward a goal. The idea is to connect the buildup of money to the desired toy.
Ages 7 to 10: Learn through trial and error
At this point, your children are starting to understand what money can buy, and are learning the value of coins and bills, but they may still need visual aids to help them save. Gotlib says it’s a good idea to stick with the savings jar, but increase the number, perhaps giving your child one for day-to-day spending, another for big-ticket items, and a third for charity. Using these different jars continues to encourage goal setting, and starts to introduce the idea that there are different things kids can do with their money.
What’s more, since your kids are starting to learn what things cost, it’s a good time to introduce the idea of "needing enough money," and waiting until you have it. Take your child shopping and talk about how you don’t have enough money to buy an item now, but will be able to purchase it after you save more money. "Kids learn by modeling what their parents do," says Gotlib, "so if you can model a delay in spending, they’ll get the message."
Time for trade-offs
Try letting your children experience "not having enough money yet" on their own. Let them pick out something special at a store, something they can’t afford at the moment, and demonstrate that in 3 weeks, for example, if they save their entire allowance, the item they want can then be purchased. If your child chooses to buy something less expensive and less desirable now, rather than waiting for the bigger prize—consider allowing it. This can be a valuable lesson in trade-offs: If you spend now rather than save, you might not get what you really want later.
Ages 11 to 14: Show a variety of purposes for money
By this time, children are generally old enough to understand that money can have multiple uses. They need to understand that money can be saved for the long term (such as for a college education), stashed aside for emergencies or a rainy day, donated to those in need, and, of course, spent on things they want.
Try teaching your kids the value of money through a “bucketing strategy.” This means putting a certain amount of money away for different purposes. They might have short-term goals such as buying a new phone or donating to charity, and longer-term goals like saving for a car. "A bucketing strategy can help you teach kids that saving isn’t meant for ‘leftover’ money," Dowd says. "In fact, saving should ideally come before any discretionary spending."
Sit down together and plan how much of your children’s money (whether it’s their allowance or money they’ve earned) will go into each bucket. Choose a good place to put the money. A piggy bank or jar at home might still be a great place for short-term saving goals because it can reinforce the visual aspect of saving, and this money probably won’t have enough time to earn any appreciable interest.
For your child’s longer-term goals (e.g., a car or personal computer), consider opening an account that earns compound interest or one that allows investments. To illustrate the benefit of letting money grow and the power of compound interest, run an experiment: Put the same amount of money into the piggy bank and the investment account for several months. Then compare the amount in each.
And, to keep those savings growing, your child should make a habit of putting at least part of any money received for birthdays, holidays, and special occasions into a savings account.
You could take it a step further by introducing the concept of long-term savings versus short-term by opening a Roth IRA on behalf of your child. As they earn money from chores or an after-school job, a portion of their savings could be earmarked for the distant future, while money meant to be spent in the next few years could be put into a savings account or another short-term option.
Make a match
Reward good saving habits! Children of all ages and young teens may not find saving as rewarding as spending all their money, so try picking a point at which to match what your child saves. For example, if your kid’s goal is to save $20, you could add an additional amount to the savings once the goal is reached. This might lay the groundwork for more disciplined savings later in life when, say, your child reaches adulthood, and potentially earns a company match through a 401(k) plan.
Ages 15 to 18: Keep track
With college on the horizon, you need to set the foundation for budgeting. While children may not be financially independent in college, they will likely have to manage their own money to a certain extent. One way to do that may be through an after-school or weekend job. "Kids may be more careful with what they’ve earned than with money that is just handed to them," says Gotlib.
Learning how to budget is a matter of building off what the child has learned up to this point:
- Money is a means to an end.
- Money has different purposes.
- There are always trade-offs.
Keep it simple. Help your child write a list of what they have to pay for with their own money and assign a cost to each item (gas, clothing, entertainment). Split the list into needs and wants, and then have your child try living on what they have budgeted for a few months as a "trial run" before college. Build saving into the budget, which may help kids see how money may grow over time and even learn some of the basics of investing.
Try new tools
High school kids are tech savvy, so put budgeting on their terms. Help set up an online budget that they can track and adjust with a click of the mouse. Or, create a simple budget spreadsheet showing your child’s income and expenses, and have them update and track the numbers each month as they spend and save money.
To raise a saver, you should model good financial habits and understand how to motivate your child at different ages. Above all, since children learn by doing, let them have real money experiences—whether it’s setting a goal and saving for it or making the mistake of overspending and learning from it. These life lessons are priceless when they translate to a financially comfortable future.
Next steps to consider
Help a child invest for the future.
Check to see if you're on track with our savings calculator.
Manage your money by budgeting for things you really want to do.