It’s never too early for parents to start teaching kids about money. When children learn how to handle these responsibilities, it builds a solid foundation for adulthood, particularly if family finances are upended. Let’s explore some lessons to help kids develop money smarts.
Even when parents don’t feel qualified because of their own past financial decisions, they shouldn’t hesitate to start teaching their kids about money. But not enough do–one survey suggests that while parents worry about their kids making financial mistakes, 73% aren't talking to their children regularly about money.¹
Practice Money Management
Your experience can make good lessons for your children. In fact, many kids are looking to parents as their role model for spending and financial habits.² Also consider that allowing your children to practice managing money produces financial confidence as they become adults. It can also help them save for college, which may help them reduce future student debt and start their future on more solid financial ground.
Whether You Start Early or Start Now, It’s Important to Talk
Money conversations may not be easy, but they are necessary. You'd much rather your child make a minor mistake—with birthday money from Uncle Bill—than a whopper of a mistake when the stakes are higher as adults. Start teaching financial know-how at any age—even the youngest children can learn the value of money.
Need some ideas? Here are five money lessons from our Raising Financially Aware Kids program to help you get started.
1. Teach the Value of Money
A foundational lesson is understanding what money is and what it's worth. Hit this idea home by providing examples of items and what value they hold.
Examples of Items and Value
Keeps you warm
Gives love and companionship
Provides fun and exercise
Cleans your teeth
Offers relaxation and fun for your family
Allows you to work, shop and watch TV or movies
Another concept is opportunity costs, or what we give up when we make decisions. For example, if your kid goes to a movie with friends, they can't go to a birthday party at the same time. Part of the cost of going to the movie is not going to the party.
Older kids can experience this with their own money. Let's say they trade a night of earning money babysitting to attend a concert. The opportunity cost includes the money they forfeited.
$40 Missing earning money babysitting
+ $70 Attend a concert with friends instead
$110 True cost of the concert
2. Help Them Learn to Earn
Another important lesson is learning to earn money. A great way for kids to understand income is through allowances. But first decide your own values around this practice.
Some parents give allowances unconditionally—without expectations for chores completed, grades maintained or good behavior. Others believe it should be compensation for work done. Under this philosophy, expectations and timeframes must be clear.
Regardless of which way you choose, allowances can be a great way for kids to learn about using their own purchasing power and making spending decisions.
3. Encourage Savvy Saving and Investing
When kids have their own money it's important to teach them about putting some away for the future. Three rules of saving are:
Save Every Time
Just Do It!
Make it fun. Let your children decorate containers marked with "Save," "Spend" and "Give." Or, help them save for something that's exciting by making a wish list, setting a small goal and saving. Consider sweetening the deal by matching their savings or paying interest.
4. Coach Budgeting and Borrowing
Let elementary kids practice budgeting with school lunch money. They can decide whether to bring their lunch (and save) or spend it on hot lunch. Or, institute a clothing allowance. Give your child a budget of what you will spend on an item and have them decide whether to stick to it or use their own money for a more expensive version. Older kids can also keep their own budget on paper or with an app.
Borrowing is another must-know concept. Explain credit scores, credit reports and the positive behaviors needed to keep scores high. You can also explain that a FICO® Score is a three-digit number based on your credit reports. It helps lenders determine how likely you are to repay a loan; and impacts how much you can borrow, how many months you have to repay and the interest rate.³ Kids will understand the concept of the credit score being like a report card and the FICO Score being like their GPA.
When your child turns 18, consider getting them a credit card but not until they understand interest rates and the importance of paying off balances. Knowing about credit and debt will be valuable, especially if they will have student loans are in their future. Before then, let them practice with a small loan from you and pay it back with interest.
5. Guide on Giving Back
A final lesson is the powerful concept of giving back. Establish a "give" bucket for a cause the whole family agrees on. Or, ask your children if they'd like to receive donations for a charity instead of gifts at their next birthday party.
Giving back doesn't have to be only about money either. Teaching children to volunteer their time, talent and resources is also a good life lesson.
It's About Smart Money Choices
Teaching your children how to handle finances may be a long journey, but It’s one that's worth it. Financial smarts are not about setting a goal to be rich; they're about having the tools to make thoughtful choices about how to earn, consume, invest and give their dollars.
Kids are managing money earlier, but it's not helping them gain financial independence any sooner: CIBC poll. CIBC Kids and Money Poll, September 2018.
Make sure your kids grow up smart about money with these strategies, CNBC, April 2019.
What is a FICO® Score? myfico.com, accessed on March 23, 2021.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.