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 could possibly leave them lacking in money smarts,” says John Sweeney, executive vice president of Retirement and Investing Strategies at Fidelity Investments.
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.
A word about allowances
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 young children a dollar and then walk away, you've taught them that they'll get the money handed to them for nothing," Gotlib says. Instead, ask them what they want to do with the money, and help them plan how many weeks it will take to save for what they want. "Having an allowance can teach a child to make independent money decisions and start taking some financial responsibility," says Sweeney.
You may think that teaching money values to a three-year-old child is an exercise in futility, but experts suggest otherwise. The more you can “show” them 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 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. Consider having them put the money in a piggy bank where they can see it grow or 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 his or her 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 his or her own 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 kids are starting to understand what money can buy and learning the value of coins and bills. But they can still benefit from 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, because 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
Let children experience “not having enough money yet” on their own. Let them pick out something special at a store that can’t be afforded at the moment, and demonstrate that in three weeks, for example, if they save their entire allowance, the item they want can then be purchased. If children choose to buy something less expensive and less desirable now, rather than wait for the bigger prize, consider letting them do it. This can be a valuable lesson in trade-offs: If you spend now, rather than save, you won’t get what you really want later.
Ages 11 to 14: Show a variety of purposes for money.
Kids at this age 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, 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 or college.
“A bucketing strategy can help you teach kids that saving isn’t meant for ‘leftover’ money,” Sweeney says. “In fact, saving should ideally come before any discretionary spending.”
Sit down together and plan how much of your child’s money (whether it’s allowance money or money they’ve earned in other ways) 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 savings 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), it’s time to consider opening a bank savings account that earns compound interest. To show your child the benefit of letting money grow and the power of compound interest, have him or her put the same amount of money into the piggy bank and the savings 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. These are good habits to reinforce, even when interest rates are low.
Make a match
Reward good saving habits! Try matching what your child saves at a certain point. For example, if your child’s goal is to save $20, you could add another $20 to his or her savings once he or she reaches that goal. This might lay the groundwork for more disciplined savings later in life, say, when 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 kids may not be financially independent in college, they will likely have to manage their own money to a certain extent.
To make budgeting meaningful, the child should be earning some money—perhaps 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 he or she has to pay for with his or her 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 he or she has budgeted for a few months as a “trial run” before college. Build saving into the budget, perhaps through a 529 college savings plan, which can help kids see how money may grow over time and even learn some of the basics of investing.
“Initiating planning conversations that focus on saving for and funding college is a critical step in the process, especially as children approach college age,” says Keith Bernhardt, vice president of college planning at Fidelity Investments.
Try new tools
High school kids are tech savvy, so put budgeting on their terms. You might help your child set up an online budget where he or she can track and adjust it with a click of the mouse. Or, create a simple budget spreadsheet showing your child’s income and expenses, and have him or her update and track the numbers each month as he or she spends and saves money.
To raise a saver, you should model good financial habits and understand how to motivate your child at different ages. Above all, because kids learn by doing, let them have real money experiences—whether it’s setting and saving for a goal or making the mistake of overspending and learning from it. These life lessons are priceless when they translate to a financially comfortable future.