Brokerage firm T. Rowe Price’s 2021 Parents, Kids & Money Survey questioned more than 2,000 parents of 8- to 14-year-olds and found that the pandemic resulted in an increased urgency to talk about money with their kids.
This is great news, as money conversations early in life can set youngsters up for a successful financial future. Let’s take a closer look at what you can do to teach your kids basic money management skills that will help them as they enter adulthood and beyond.
- Consider children’s ages when attempting to teach them lessons about money.
- As a parent, setting a good example with your own spending and saving helps your kids learn to be responsible with their own money.
- Savings and investment accounts are good tools to educate kids about managing and growing their money.
- Setting achievable goals is another way to teach the delayed rewards of saving.
Choose Age-Appropriate Lessons
Before you discuss money with your kids, it’s important to consider their ages. If they’re young, realize they probably won’t understand abstract financial concepts. However, you can still explain that you need money to buy things and that you get that money by working.
Once your kids reach school age, you can show them how daily habits play roles in how they earn money, save it, and use it. At this point, encourage your kids to work for their money through an allowance or a job for the family or others. Help them get into the habit of saving their money.
As teens begin to make their own money decisions, your guidance is key. This is when it makes sense to discuss more-complex topics such as taxes and other paycheck deductions. You might also want to reinforce the importance of an emergency fund, as well as planning for short- and long-term financial goals.
Be aware of the way you phrase things. Telling your kid you can’t afford something when you really can, or making comments like “money doesn’t grow on trees” can confuse them.
Set a Good Example With Your Spending and Saving
“Kids learn more from showing instead of telling,” Charles H. Thomas III, certified financial planner (CFP), financial advisor, and founder of Intrepid Eagle Finance, told The Balance by email.
For example, if you silently shop for a good price on your phone, your son or daughter will find it difficult to understand the concept of comparing prices. However, if you take them on an outing to the store and compare items while you explain what you’re doing, they’ll be more engaged and likely to absorb your lesson.
Because “kids see and take in everything you do and say, make sure you spend responsibly and talk about money in positive ways,” Andrea Woroch, a nationally recognized family finance expert, told The Balance in an email.
While it’s easier said than done, don’t give in to a child’s requests for a new toy when you’re out running errands, and avoid constantly buying new clothing or things you don’t really need, to avoid passing impulsive shopping habits on to your child.
Open Savings and Investment Accounts With Your Child
There are a number of accounts you can open for your kids. Some of the most common include custodial checking or savings accounts at banks. For investing, consider UTMA (Uniform Transfers to Minors Act) or UGMA (Uniform Gifts to Minors Act) accounts, along with custodial Roth IRAs at brokerages.
Custodial Checking and Savings Accounts
Custodial checking and savings accounts are a lot like the checking and savings accounts you likely have as an adult. The only difference is that you as the parent, guardian, or grandparent set it up and manage it for your minor child. Once your child turns the age of majority (18 in most states), they will become the owner of these accounts and have complete control over them.
UTMA and UGMA Accounts
With a custodial account such as a UTMA or UGMA account, the money is fully owned by the child but can’t be accessed until age 18. “An UTMA has some advantages, including up to $1,050 of earnings tax-free, and the next $1,050 at the child’s tax rate. But any earnings over $2,100 are taxed at the parents' rate,” said Josh Frankel, a CFP at Ferguson Wellman Capital Management, in an email to The Balance.
Custodial Roth IRAs
A custodial IRA can allow your son or daughter to contribute after-tax dollars toward retirement. To do so, your child needs “earned income.” This can be from just about any source, like babysitting, delivering groceries, or working for your business. When your child reaches 18 or the legal age in your state, they will need to convert their custodial IRA to a regular Roth IRA.
If your child decides to withdraw money from their Roth IRA before they reach retirement age, they won’t face any penalties as long as certain conditions are met.
“We encourage parents to establish savings and investment accounts in late elementary school,” Clayton Quamme, partner and certified financial planner (CFP) at AP Wealth, said in an email to The Balance.
“Start with a few hundred dollars and make sure you select paper statements. That way, when the statements arrive, your kids get to open mail and see the different accounts. Then, they can compare the difference in how the money grows in savings versus investment accounts,” Quamme said.
Set Achievable Savings Goals
Sit down with your child and help them set a tangible goal they can reach fairly quickly. If they’re younger, this may be a new toy. An older child may want an experience like a trip to the amusement park or the movies.
Once they have a realistic goal, help them figure out how they’ll meet it through an allowance or a job. This strategy will allow them to feel the reward of saving for a big purchase and delayed gratification.
Set Budgets Together as a Family
“One easy way to involve kids with a budget is to bring cash to a grocery store and let them know you have $100 to spend,” Frankel said. If you do this, kids will see firsthand how much groceries cost and how the transaction works.
Cash works better than a credit card in this example, so children know it’s real and not a magical way to pay for the groceries.
Food is another way to get kids involved. “If you're planning to have spaghetti this week, for example, let your child choose the ingredients at the store. Walk them through decisions like buying the store brand or name brand, along with the pros and cons. This is also a good chance to practice math skills in a practical way,” Thomas said.
Show How Savings Can Earn Money
Understanding compound interest is one of the most important financial skills you will ever teach your child. “Albert Einstein said, ‘Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.’ Those words are more true today than ever before,” Quamme said.
Another idea for illustrating this important financial concept could involve sweets or similar treats. “You can use candy to explain compound interest to your child. Give them a small amount of their favorite candy in a ‘bank.’ Then provide the child with more treats in their bank the next day,” Frankel said. Reward them with some more treats if they don’t consume the initial candy deposit.
If your child is older, you can share a more in-depth example like this one from Doug Carey, founder of WealthTrace, a financial planning and retirement software provider.
If a 30-year-old saves $15,000 in 401(k) plan every year and earns 8%, they’ll have nearly $1.7 million saved in 30 years. But a 45-year-old who saves the same amount for 15 years would have just over $400,000, less than a quarter of what the 30-year-old would have.
The Bottom Line
By making it a priority to teach your kids about money, you can help them build the financial literacy they need to make smart financial decisions throughout their lives. Even if your kids are young, having age-appropriate money conversations will likely lead to responsible spending and strong financial management for years to come.
Frequently Asked Questions (FAQs)
When should you start teaching your kids about money?
Research shows that many of the money habits we practice as adults are set around age 7. That’s why it’s wise to instill money-related lessons in your kids at very young ages. You can start as early as age 3 with basic concepts, and move on to more complex ones as they get older.
What are some good ways for kids to make money?
There are many ways for kids to earn money. Depending on their age, they might set up a lemonade stand or run a yard sale. They also could be a mother’s helper or babysit other kids. In addition, they can care for pets, collect recyclable materials, wash cars, and do yardwork.