Dear Lifehacker, I want my kids to be smarter with their money than I was in the past. How should I go about teaching them about it, and at what ages? Signed, Penny-wise Parent
Good on you for wanting to teach your children financial smarts. Money management is one of the most essential life skills, and it’s up to parents to show kids how to handle their finances responsibly, as early on as possible. Here’s what we found kids should know about money at each stage of their lives and ways you can teach them.
Set an Example Yourself
There are as many approaches to teaching kids about money as there are different parenting styles. When we last asked you about this subject, some replied they use the allowance system, while other parents simply instruct their kids to work for anything extra they want. Regardless of your specific philosophy, the most important thing may be to teach by example, using everyday life lessons.
You can start as soon as they’re able to count, the Payjr Education Center says. From there, every time you pay a bill, go to the bank, swipe a credit card, check your spending or work overtime are opportunities to have important conversations about money. (In the end, I think the best skill you can teach kids in general is how to make good decisions, whether we’re talking about finances or other areas of life.)
Just as important as what you tell your kids about money is how you talk about it. Instead of saying “We can’t afford that” when your child wants a ridiculously priced toy, a more positive (and teaching) approach is to say “We don’t buy every thing we want but instead choose which are the most important things to spend our money on.” Then set a budget with them and encourage them to save up for those non-necessities.
Financial Milestones for Kids at Different Ages
Of course, the specific money lessons you teach will depend on your kids’ ages. Recently, the White House under US President Obama launched an initiative to come up with the essential financial lessons parents should teach their kids. The advisory council reviewed financial literacy guidelines, standards and research over 16 months and came up with 20 essential “money milestones” for kids to learn as they grow. Here they are, by age group:
Ages 3 to 5
1. You need money to buy things. Teach young kids how to identify coins and bills. Playing pretend store or restaurant is also a fun way to demonstrate how money is used to pay for things.
2. You earn money by working. Or, you know, the old “money doesn’t grow on trees” lesson. Talk about your job with your child and point out different occupations as you walk around your neighbourhood. Richard Scarry’s Busy, Busy Town and other books/games are a classic introduction to this concept.
3. You may have to wait before you can buy something. I use a save, spend and share system to help my daughter learn to set money aside. When she wants something at the shops, we’ll see if she’s saved enough or put it on a wish list.
4. There’s a difference between things you want and what you need. My daughter’s kindergarten teacher actually taught her class to sort things into circles by wants or needs. You could do the same, cutting out pictures of food and a house, for example, in a teaching game.
Ages 6 to 10
5. You need to make choices about how to spend your money. Money As You Grow suggests that when shopping you ask aloud questions like “Do I need this item? Can I borrow it? Would it cost less somewhere else?” If a friend’s birthday party is coming up, let your child choose the gift with a set budget amount.
6. It’s good to shop around and compare prices before you buy. Simple lessons at the supermarket, such as comparing unit prices, teach kids that smart shopping helps you keep more of your money and makes it go farther. Trent at The Simple Dollar taught his seven-year old to pick out a week’s worth of groceries with a $100 budget. (It also makes for an interesting week of dinners.)
7. It can be costly and dangerous to share information online. Use your gadgets’ parental controls but also teach them basic rules such as never buying anything without your permission or sharing personal information on the computer.
8. Putting your money in a savings account will protect it and pay you interest. Open a savings account together and track how the savings grow.
Ages 11 to 13
9. You should save at least 10 cents for every dollar you receive. This is an awesome automatic habit for a child to learn at an early age.
10. Entering personal information online, like a bank or credit card number, is risky because someone could steal it. Talk about things like online fraud and identity theft. Google’s “Good to Know” safety and security site is a good one to visit with your child.
11. The sooner you save the faster your money can grow from compound interest. An online compound interest calculator can demonstrate this “secret to getting rich”.
12. Using a credit card is like taking out a loan. Talk about how you pay your bill in full each month and show how long it would take if you only paid the minimum with the MoneySmart calculator.
Ages 14 to 18
13. When comparing universities, consider how much each school would cost you. MyUniversity.gov.au compares course costs and employment rates.
14. Avoid using credit cards to buy things you can’t afford to pay with cash. Sort of a repeat lesson from #12, but important to drive home!
15. Money gets taken out of your pay for taxes. Review a payslip to show how much goes to the government and discuss why.
16. Superannuation funds retirement. Once your kid is old enough to earn money from a job, open a superannuation account with him or her and explain how starting early will mean significantly more savings by the time your child retires.
17. Only use a credit card if you pay it off in full each month. Yes, again.
18. You need private health insurance. Most insurance plans let young adults stay on their parents’ health plans until age 20 or so. Also talk about home insurance and auto insurance, and comparison shop for them together.
19. Save at least three months of expenses for emergencies. Help your son or daughter draw up a budget, estimate the emergency fund needed, and automate the process.
20. Consider the risks and annual expenses when investing. A high expense ratio or investing fees eat up your savings. The Wall Street Journal has more advice for teaching kids about investing, and Warren Buffet even has a cartoon for kids.
One other thing not mentioned in the 20 milestones list but worth talking about with your kids once they’re old enough to use a credit or debit card is the importance of maintaining a good credit score.
It might seem like a lot to discuss with your kids, but if you can help them avoid making avoidable money mistakes when they’re older, you’ll have helped them immensely.
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