How to teach young kids about money so it sticks with them

Money lessons for kids that will last a lifetime.
Image: Piggy Bank
Kids need tangible ways to understand abstract concepts, so it’s important to give them concrete tools to practice them.Elva Etienne / Getty Images
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By Nicole Spector

“Money doesn’t grow on trees.”

This is the nugget of wisdom that so many of us were handed as children, and often the financial literacy education ended there. A new survey by CreditsCard.com found that one in four U.S adults with children under 18 said their parents provided no money lessons as a child.

In the case of money matters, ignorance is not bliss, and what you don’t know can hurt you. Research shows that children benefit from learning about how money works, beginning at a very young age, with some schools stepping up to tackle the issue in the classroom.

How can parents teach financial wisdom to their own children in a practical way that will benefit them for their whole lives?

We’ve compiled a list of tips from money experts — many of whom are also parents.

Explain where the money comes from

“When you’re teaching your kids about money, it’s important to teach them where it comes from. Money does not just come from mom and dad’s wallet,” says Rachel Cruze, personal finance expert and the co-author of “Smart Money Smart Kids: Raising the Next Generation to Win with Money.” “When you work, you get paid. When you don’t, you don’t get paid.”

The key is to repeatedly demonstrate and demystify the relationship between work and money.

Preach the three principles: giving, saving and spending

“Once you’ve established that money comes from work, I recommend teaching your kids three basic principles when it comes to money — giving, saving and spending,” says Cruze.

“Giving is one of the most important of the three categories because you’re teaching them to feel the impact of helping others at a young age. That’s invaluable,” Cruze continues. “As for saving and spending, encourage your child to set aside some of their money to savings and some to spending each time they get paid. Remind them that once their money is gone, it’s gone. And yes, your kids will make mistakes, but it’s better that they make those mistakes under the safety of your roof.”

Have your child physically organize cash with three piggy banks

Kids (especially young ones) need tangible ways to understand abstract concepts, so it’s important to not just explain these three money principles, but give them concrete tools to practice them.

“Instead of just having one piggy bank for your child, get three, and label one ‘spend,’ one ‘save,’ and one ‘give’,” says Logan Allec, CPA and founder of the personal finance site Money Done Right. “Any time your child gets money — allowance, payment for completing a task, birthday money, etc., — encourage them to split the money up between all three banks. The key to this being educational is to allow your child to choose how they split the money, as well as what they do with it.”

This exercise is not only helpful in getting kids confident in money matters, it provides an opportunity for parents to have meaningful conversations with their kids about money management.

“Talk with them about both what they will do with their money as well as how they could have split their money up differently if an appropriate situation arises,” says Allec.”Ultimately, though, the decision should be up to your child.”

The key is to repeatedly demonstrate and demystify the relationship between work and money.

Tea Nicola, CEO of WealthBar, raves about this technique.

"My daughter who is eight understands that there are three buckets of money that she has to keep track of: saving, spending and giving,” Nicola says. “For her, saving is usually for big ticket items like going to a special summer camp or other experiences she wants to have. Spending money is what she can use on a daily basis, such as buying a candy bar or something like that. We're also teaching her the importance of giving. This could be giving to charity ... or it could be giving to others, like buying a present for her friend’s birthday.”

Bring the kids in on family budget talks

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“I have found that the best way to teach your kids about money is to bring them in on family budget discussions,” says Leif Kristjansen, the founder of FiveYearFIREescape, where he blogs about his early retirement. “They will see how you responsibly handle all of life's pile of bills and issues. Kids naturally want to emulate their parents so they will start to think about spending and how to minimize it.”

These money talks should be casual and can even take place at the dinner table.

“Usually, we have the talks before dinner because we are all in the same room but we are open to discussions whenever they arise,” says Kristjansen. “Our talks would involve reminders between [my wife and I] to check or pay the bills or to move money into investment accounts.”

If your kids are too young to really participate, that’s fine. The goal here is to simply get comfortable talking about money as a family without stigma or stress.

Paying the bills online? Let kids in on the process

Budgeting and taking care of bills can be a headache. Why not bring your toddler in to lighten the mood? You may be rolling your eyes, but it's doable, says Kristjansen.

“I let my daughter [who is not yet school-aged] sit on my lap while I pay the bills or check on my investments to see how it works,” says Kristjansen. “I don't let her hit many buttons in case she does something bad, but she still likes it. Everything is digital now so it's less tangible for kids, but they know I hit some buttons on the computer to pay the bills and are happy to be a part of it.”

Give cash for birthdays so they see can make budget-based decisions

Come birthdays and other holidays where giving gifts is the norm, consider giving kids money instead. This not only saves you time on shopping, it empowers kids to do the math and be shrewd.

“We stopped buying gifts and started giving them money so that they can make budget-based decisions,” says Thomas. “In the past, when they made birthday and Christmas lists, they put so much on the list — we thought they should start understanding how much things cost.”

Allowance is fine, but make it count

Kids, like all humans in civilization, will come to a point when they need money. This could be for sports activities, a field trip or buying their friend a gift. Giving them an allowance is totally fine, but enable them to earn it. This again strengthens the understanding around how income works.

Nicola pays her eight-year-old daughter for doing chores outside her normal daily tasks (for instance, she does not get paid for cleaning her room or helping care for her younger brother, which are non-negotiable).

“You don't want [your child] to associate chores exclusively with earning money,” says Nicola. “Because if she ever gets a job, she's [then] going to stop doing chores in the house. And that's a problem, she has to contribute to the household like everybody else.”

Kevin Klug, co-owner of Secure Retirement Solutions, suggests giving allowance after a set of weekly chores have been completed. If the chores aren’t completed, “they now owe you [money] for every chore not completed.”

Allowance shouldn't just be for fun stuff

Allowance should be issued with the understanding that some of this money can be on fun stuff, but some of it also has to go towards covering needs. This lesson can intensify as kids get older.

“When deciding how much allowance to give, you’ll want to be sure that everyone understands what the allowance must cover. Is it school lunches? Snacks? Computer games? Extracurricular activities? For older children, you may want to add clothing or other bigger ticket items to the list,” says April Lewis-Parks, a mom and the director of education for Consolidated Credit. “Always write it down initially so there are no misunderstandings later.”

If your child is meeting their saving goals, consider throwing in a bit more cash the next week.

“We incentivize not spending their allowance by giving them extra money if last week's money is still around,” says Kristjansen. “It's an odd version of compounding but we are trying to drive home the value of saving.”

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Kid blew all their money and needs more? Seize this teachable moment

Many parents can relate to this scenario: your kid had money, but they spent it all at the toy store. Now, you’re at the toy store again and they want something but they don’t have the money. What do you do?

Don’t cave. Instead, seize this “teachable moment,” as Cruze calls it.

“Teach them that when money runs out, it runs out,” Cruze says. “It will be tough in the moment, but in the long run you are teaching them to live below their means — and that’s the only way to win with money.”

Scrolling through the cable channels? Talk about your cable bill

Keep in mind that there are plenty of less painful teachable moments when it comes to lessons about money.

Misty Lynch, CFP, and head of financial planning at John Hancock, has found one such moment when watching TV with her young kids.

“They will look for movies on TV and can understand what the word ‘free’ means versus something you have to pay for,” says Lynch. “They love when things are free and so do I, considering what we already pay for cable.”

Work on your own relationship with money

Young children are constantly observing — and absorbing — our behavior. If you’re spending above your means, or stressing about money, your kids are likely picking up on this and learning that this is what money is: a thing of scarcity or scares, or whatever you project onto it.

“I always say that ‘more is caught than taught.’ Your kids will see how you handle your money, and their actions will mirror that,” says Cruze. “So if you are always stressed or have a scarcity mentality when it comes to money, they will likely grow up to be that way, too. If they see you spending above your means, they’ll think that’s normal for everyone. You have the opportunity as their parent to lead by example and set them up to win with their money.”

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