Talking to kids about money can be awkward, but it’s important. A recent T. Rowe Price survey showed that parents consider topics like death and politics easier to discuss with kids than saving for a goal. 85% of parents wanted to avoid the issue by signing their kid up for a personal finance course.
While signing your kids up for a class will help, your kids will typically emulate your behavior.
“Parents are the number one influence on their children’s financial behaviors,” Beth Kobliner, author of “Make Your Kid a Money Genius,” told Forbes. “It’s up to us to raise a generation of mindful consumers, investors, savers and givers.”
Here are what we believe are important financial lessons to teach your kids at different ages and stages.
Ages 3-6
It may surprise you, but at the age of 3, your kids can grasp basic financial concepts. By age 7, they have already formed money habits, according to a Cambridge University study. Start with the basics, including the idea that you work to earn money to pay for what you want and need – and help your kids understand the difference between wants and needs.
- Recommended Exercise: Create a wants vs. needs collage – divide a sheet of paper in half and have your child cut and paste photos from magazines into the two categories.
Another milestone identified by the Consumer Financial Protection Bureau is the ability to focus and persist through tasks and conditions. Saving for retirement takes large amounts of discipline (especially in more challenging financial periods), patience, and a long-term perspective. It is important to teach your children the habit of saving and investing early.
Recognizing tradeoffs is another important early lesson.
- Recommended Exercise: Shopping – Ask your children to think about the amount of money you/they are exchanging for a product (paying $5 for a cup of Starbucks is equal to a gallon of ice cream – 1 time item vs multiple use item) and have them help you compare the prices of similar goods (apples vs bananas). Whether a trade involves money, treats, or time, it is important to help your children learn that every financial decision has benefits and consequences; but it is equally important to learn that “treating yourself” occasionally is a healthy habit.
Around age 5, we recommend giving children some cash to manage. A regular allowance allows them to start thinking in terms of financial tradeoffs, and we recommend a three “piggy bank” method (save, spend, and donate), so they begin to understand the different functions of money.
By age 6, children should be able to focus on completing small chores to earn money and understand the value of different coins and bills well enough to sort and count them.
Ages 7-12
As your child grows, help them understand your values and develop their own values. Help them understand that that some families live in poverty and may not be able to meet their financial obligations. Using a website such as Dollar Street that shows photos of different families around the world living on a variety of incomes can help. We believe it is helpful to allow your child to have a say in where the family’s charitable dollars will go.
- Recommended Exercise: Find an organization(s) that correlates dollars toward gifts (ex. $X will provide School lunch for 1 child per month, $Y will provide school supplies for 1 child). It is also helpful if you can find items that can be purchased that provide on-going benefits (ex. A goat provides milk for years). Giving children a budget and allow them to select the gifts is a great method to teach these values.
We also believe that it is important to pass down family values & stories to the next generation – how you (or your parents) pitched in to help build a business, your first big purchase, or how spending habits helped you weather the ups and downs of life. These stories are the things that children can relate to the most and can use to develop perspective on what has value in life.
In this age range, it is good to have your child open a bank and/or an investment account, which can help them see the benefits of saving and investing as they set their financial identity. You should help them track what they are earning in interest. “There’s nothing like receiving an interest payment (even if it is a few cents) in your name for the first time,” Asheesh Advani, CEO of Junior Achievement Worldwide, told Inc. magazine.
- Recommendation: Matching Savings – If you are able and willing, a great motivator to help children learn the benefits of savings is to match all or a portion of their savings. (ex. For every $100 they save you contribute $25). This teaches them the concept of compounding interest and how money grows over time. This also has the benefit of teaching them to be excited about saving money.
Ages 13-18+
Credit cards, investing, and taxes: As your child becomes a young adult, it’s time to step up the education to help them with more complex topics. We recommend you help your young adult create an account with the SIFMA Foundation’s annual Stock Market Game simulation (a software that allows children to manage a virtual $100,000 investment portfolio).
- Recommended Exercise: Investment Simulator Account – Have your child create an account with the SIFMA Foundation’s annual Stock Market Game (Link) simulation (a software that allows children to manage a virtual $100,000 investment portfolio). In addition, we suggest that you have regular “Investment committee” meetings where your child presents investments that they want to make in their account. You can discuss why they think this is a good investment, pros and cons of the investment, if it is a responsible company, and what are they going to trade-off (i.e. sell) to have the money for the investment.
This is also a vital time to start teaching the budgeting process.
- Recommended Exercise: Give your child a budget for school supplies or cloths and allow them to shop for the supplies. It you are willing, allow them to save the difference between what they budgeted and what they spent or conversely, make them pay the difference if they went overbudget.
One of the most important activities during this stage of life is teaching your children about debt, specifically credit cards.
- Recommended Exercise: Calculate Credit Card Interest with Minimum/Partial/Full payoffs -Have your child look up interest rates on a credit card and enter the values into a credit card payoff calculator (email us and we can send you the spreadsheet).
Consideration: Before your teen racks up any credit card debt of their own, consider adding them as an authorized user on your card. Show them that interest accrues unless the balance is paid off – and that any late payment hurts your credit score. This also allows them to build some credit history.
Talk to your children about which data sources can be trusted (this is a new skill – when most of us were growing up there was more reliable published data sources vs. today where anyone can post data that may or may not be true). Share how you vet financial decisions and urge your teen to keep digging if what they’re being told doesn’t add up. For example, if your child is being told that someone is getting 15% investment returns every year it is important to be skeptical.
Statistics show that one of the most common attributes of financially successful people is getting a job as a teen. It is important to experience firsthand the effect of taxes, having a boss, being part of a team, and managing your time. A seasonal job during school holidays or a part-time gig could help your teen better grasp the working world and how they picture themselves in it.
Finally, have your young adult develop a savings plan for long-term goals like a car or college tuition. You can use a budgeting app (try Goalsetter or Mint) that helps them visualize their progress, keeps spending in check, and gives them a sense of ownership and confidence in their future.
Start the Conversation
Whether your child is 7 or 17, they are ready to hear money talk from their parents and grandparents. The most important aspect of financial literacy is sharing your values, as much as dollars and cents. You have the ability in a few teachable moments, to shape and empower them to have a solid financial future.
We will host a lunch-and-learn for high school and college students to assist with financial education. Please let us know if your child would be interested in attending.
We are always available to answer your questions and offer perspective. Please do not hesitate to reach out. Thank you for your continued trust.
Sincerely,
The S. Harris Financial Group
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Sources: T. Rowe Price 2019 Parents, Kids & Money Survey; Forbes; Inc. magazine; CNBC Millionaire Survey; U.S. Consumer Financial Protection Bureau; Sallie Mae’s 2019 Majoring in Money report; mtmfec.org