Money is essential to living in the US, so everyone needs to know the basics about finance. Not many schools teach the subject. You might have to be the one to teach your children money fundamentals, no matter their age. If they’re old enough to earn an allowance, they’re old enough to learn how to deal with it.
We’ve arranged the concepts below from simple to more complicated. Kids today are often well-versed in TikTok and Snapchat but not money. As the parent, you’ll know where they are in terms of financial sophistication. How you talk to your kids can also differ depending on how old they are. The idea of a spending plan for a six-year-old shouldn’t be discussed at the same level as with your teenager.
Your children should have a good understanding of most of these before they get to college (with the possible exception of retirement savings). Don’t worry if you missed that deadline, because it’s never too late!
If you can, start early so your kids don’t get tempted by the credit offers that wash over college campuses. Or they don’t end up taking out $300,000 worth of loans to obtain a credential that would only generate around $40,000 per year in salary (true story).
Spend Less Than You Earn
Even young children can learn this at a very basic level. Suppose they’ve earned $5 in allowance money. Talk to them about setting some aside for later, maybe buying a gift for a sibling, and taking the rest to spend.
This can be scaled up as necessary for older children. They might want to spend money to hang out with their friends.
Plant the seed of spending less than you earn as early on as you possibly can, and water it regularly! Make sure the concept of saving is built in. Right away your kids understand that a portion of all earnings should be stashed away for later.
Wants vs. Needs
This is huge for helping children learn to live a financially comfortable life. Yes, your child needs a set of pencils for school. But they don’t need the super-expensive set.
Yes, they need clothes to wear. But they don’t need designer outfits.
Yes, your young child wants a lollipop, but they don’t need it.
Help them make a list of what they need and what they want. You might be surprised at what goes in each category! Talk to them in an age-appropriate manner about making sure that their needs are covered before they spend on their wants.
For example, you might expect your older children to purchase some school supplies or cover their own cellphone bill (or whatever), using their allowance or part-time job money. Be clear that they pay for these requirements first. Before they spend their money on other items like entertainment.
Money as a Tool Not an End Goal
You don’t want to raise a Scrooge McDuck who enjoys their money by diving into a pile of gold coins! Help them understand that the point of life is not to amass as much money as possible, but to lead a fulfilling life using money as a tool.
With younger children, keep it simple. Do they like it when other kids don’t let them use their toys, but keep the toys all to themselves? Those kids are greedy, and no one wants to play with them.
Children who see money as a tool and not an end in and of itself are less likely to be greedy and more likely to use it responsibly.
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Charity
As a follow-up to avoiding greed, kids can be taught the value of helping others. Sometimes that’s a financial donation, but it often isn’t. A great lesson for this is to “adopt” a family at the holidays. Choose a family whose children are similar in age to your own, and have them help pick out the items needed.
In addition to money, children can learn to donate their time. Make it fun! If they love the water, join in on a beach cleanup during the summer. There are plenty of organizations out there so you’ll find one that works for your family.
Whether your family plans to donate money or time, talk to the kids about how they can determine if the charity is legitimate. How do you know that the money goes where you want it to go? When choosing the volunteer activity, they can also do (age-appropriate) due diligence.
Set Financial Goals
It’s highly likely that your kids, no matter what age, want something! They may not have the money for it. Teach them how to solve this puzzle.
For young children, pick a goal that won’t take too long for them to achieve. For older children, if it’s a more expensive item, you might contribute some amount and then have your child save up for the rest.
Sometimes, kids find through this type of exercise that the original goal isn’t quite worth saving all that money. That’s OK, and it’s a valuable lesson as well.
Debt and Compounding Interest
You might save this lesson for your older children. However, they definitely need to know it before they go off to college. They must understand that when they don’t pay off all the debt on a credit card, it grows higher than the amount they originally took out.
You can probably find illustrations of this online. Most credit card companies now show on the statement how long it takes to pay off a certain amount of debt when only the minimum payment is made.
Credit scores are also important for kids to understand. How too much debt makes it harder for them to buy cars and houses, and even rent apartments or get a job. Having a good credit score means using debt responsibly (e.g., paying off the credit card in full at the end of the month) and not having too much of it.
Debt vs. Credit Cards
Kids today aren’t necessarily familiar with checking accounts, so the difference between debit and credit may not be immediately obvious to them. Explain how the debit card draws from their account. And has no impact on their debt or credit score.
By contrast, paying on a credit card leaves the money in their account alone. But if they don’t pay the credit card off at the end of the month, they’ll owe more than the purchase price.
They also need to understand that this type of purchase could affect their credit score as well, if they’re not responsible about paying off the balance every month.
Taxes
Here’s another subject that’s probably better for older children. Not only income taxes on the money that they earn, but also sales tax on what they buy. They’ll need to learn that the price of the item on the rack isn’t what they’re going to pay at the cash register.
A big misconception kids (and adults!) have about income taxes is that the tax bracket rate applies to all their income. Introduce the concept of marginal taxes, where the bracket rate applies only to the amount above a certain floor according to the tax code. Let them know what income taxes are used for: roads, fire departments, public health, and the like.
If your child is earning money, whether it’s from YouTube videos or a part-time job, they should learn how to do their own taxes. My dad made me learn how to do mine back when there was no software. It’s a great life-skill for your kids to have, and they understand why the money they see in their account isn’t the $15/hour that was promised!
Emergency Fund
Before your child goes off to college, make sure they understand the importance of having savings they can draw on in case of emergency. One to two months worth of basic needs costs put aside is a great start.
Retirement Savings
One key concept to get across is the importance of saving for it ahead of time. Hopefully you already planted that seed with the idea of spending less than you earn, and the discussion of how compound interest works. This time, it’s working for them, not against them.
Another is why tax-deferred accounts are so attractive. Most kids should probably be opening Roth accounts if they’re eligible to make retirement contributions, but at this stage you probably don’t need to get into the nuts and bolts of traditional v. Roth.
They’ll need to learn about stocks and mutual funds. That a share of stock means they’re owning a share of the company they’re buying. Stocks are best for long-term investments, which is also important for them to know.
They’ll need to learn about stocks and mutual funds. That a share of stock means they’re owning a share of the company they’re buying. Stocks are best for long-term investments, which is also important for them to know.
Would you like to invite your adult children to your next planning session so they understand your plans and goals? Give us a call at 619.255.9554 or email us.