Money is a foundational part of our lives. But it’s also a subject many children are expected to understand intuitively just by watching their parents when they’re young. The result is that many children don’t learn about more complex financial concepts until they’re teenagers or young adults.
Seasoned investors know that having more time is a huge benefit. It’s, therefore, essential to teach your kids earlier than later about important personal finance concepts that will earn them extra wealth in the long run.
If you’re a parent or guardian trying to fill the gaps in your child’s understanding of money, this article is for you. Teaching your kids about money isn’t just about learning how to budget or understanding the value of a dollar. It’s also about instilling lifelong habits that will lead to greater financial independence and responsibility. Here are our tips for giving your kids a thorough financial education.
Key Takeaways
- Children will have gaps in their knowledge that you’ll need to fill. Concepts like insurance, mortgages, and inflation may be incredibly confusing to a child, but they’re essential to developing financial independence.
- Making your child do chores when they’re young can teach them patience, responsibility, and time management.
- Consider opening a Roth IRA in your child’s name and teaching them about saving early on retirement.
What to Do When For Kids (Age 5-9)
Assign them chores
Here’s a simple one that you’ve probably already done. Assigning your kids chores is an excellent way of teaching them early on the idea of work translating to wages earned. Chores can be foundational to a child’s education in more ways than one. They can teach kids humility and respect for manual laborers. Shoveling snow for my parents growing up taught me both patience and made me physically stronger.
If you pay your kids an hourly wage (or half-hourly wage), they should quickly learn that more work should translate to more significant compensation.
Introduce concepts like savings and investing
Once your kids start earning money from chores, it’s also an opportunity to teach them the importance of saving. Encourage them to set aside a portion of their earnings for future needs or wants.
By doing this, kids can learn delayed gratification and that saving is a way of eventually being able to afford more expensive things (maybe encourage them to save for a new pair of shoes or a bicycle). Having a visual aid like a piggy bank or a glass jar may also encourage saving.
If you have a particularly bright kid, it might be worth introducing them to investing. Maybe have your young child give their money to an older sibling, with a written agreement that the older sibling will pay interest for every day they don’t return the money. If you get your older child to agree to this, it could be a learning opportunity for both of them, teaching them about the risks of taking out a loan and money’s ability to work for itself.
What To Do For Tweens (10-13)
Introduce more advanced financial topics
As your child enters the tween years, it’s the perfect time to introduce more advanced financial concepts like stocks, bonds, and basic business fundamentals. Though these topics are complex, they can be broken down into more bite-sized bits to make them approachable.
For example, you can teach a child about the basic concepts of growing a business. Explain that businesses need to generate funds to operate, and can obtain said funds from people in exchange for partial ownership of the company – a stock. By purchasing stocks, investors essentially buy a piece of the company and become a shareholder. As the company grows, the value of the stock increases.
On the other hand, bonds are loans that companies or governments borrow from individuals. You can frame it as the opposite of a bank loan – instead of you borrowing money from the bank, the bank (or a company or the government) borrows money from you. The bond issuer promises to repay the loan amount — plus interest — after a certain period.
One strategy for making these ideas more palatable for children is to use companies or brands they’re already familiar with. Try to use concrete nouns (Nike store) rather than more abstract ones (large company) to explain topics. It may also be worth teaching your kids how different investments are more or less risky than others. Investing in the stock market is riskier than investing in a bond, but the added risk also translates to greater potential for reward.
Your kids should already understand some of these concepts by now, so hopefully, you won’t have too many gaps to fill.
What To Do For Teenagers (14-17)
Make them get a summer job
Encourage your kids to get a summer job when they reach their teenage years. A job will keep them social and active during the summer months and allow them to earn their own money and gain valuable work experience. Having a summer job like lifeguarding, scooping ice cream, or even just babysitting can teach a teen about responsibility, time management, and professionalism, all essential skills for their future careers.
Open a Roth IRA for them
With your teen’s money from their summer job, you could consider opening a Roth Individual Retirement Account (IRA) in their name. Though you’ll have to open a custodial account for your minor child, a person of any age can invest in a Roth IRA. Having a Roth IRA is an opportunity to teach your child about investing in their future early on. The sooner they start contributing to a retirement savings plan, the longer the investment has to grow.
With this, you could also teach your teen about the importance of having a retirement savings account and go over some of the different options they may have over the years. In today’s digital nomad age, it may be worth going over retirement savings options for self-employed workers, like solo 401(k)s and SEP plans.
Remember that withdrawals from a Roth IRA are tax-free at retirement, adding financial security in their later years.
Introduce them to the world of credit
Though a minor technically can’t open a line of credit in their own name, they can become an authorized user on a parent’s credit card (though some age limits may apply). You can also consider getting your teen a prepaid debit card to let them practice paying with plastic. Having a card will help them learn how to use ATMs, withdraw money, and use card readers at stores.
Having a joint debit card with your teen is another way to get them access to a card. The important thing is to find ways to help your child start building good credit early on. Because the amount of time you’ve had your oldest account factors into your credit score, getting your child to open an account or join your account earlier on is a great financial decision.
Teach them even more advanced financial topics
Some topics risk being too confusing to preteens that you should definitely make sure a teenager understands. Some of these include topics like inflation and how more complex loans (like mortgages) work.
Making your child read the newspaper is one way of introducing them to things like inflation and monetary policy. For example, you could direct your child to an article about the Federal Reserve raising interest rates, and use that as a gateway to discussing the importance of the Fed funds rate in influencing how banks loan each other money, which influences how expensive debt becomes, how investors spend their money, and business revenue.
Understanding the complexity of these topics can be daunting to someone who’s just 12 years old. But for a 17-year-old, it may be worth forcing them to sit down and really understand it.
General Finance Tips to Teach Your Kids
Even if you don’t end up following the above tips, there are certain money-related principles you should try to teach your child from a young age. Teach your kid about budgeting and the importance of living within their means. Teach them that not all debt is bad and that knowing how to manage it is crucial. Introduce them to insurance, taxes, and inflation concepts, and how these play into their financial planning.
Every child will use money at some point in their young lives, so they’ll learn many of these principles intuitively. There are many other lessons you teach your child that will impact how they learn to use their money. Teaching patience, caution, and thoughtful risk-taking will impact how your child spends in the future.
The Bottom Line
Children learn about money intuitively and by watching their parents and peers. But there are always gaps in their knowledge which you’ll want to fill over time. Encourage your child to save money, invest money smartly, take on jobs before they leave high school, and potentially open a retirement savings account to start saving early.
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