It’s nearly back-to-school season, and many parents are thinking about the lessons their children will learn in the coming year. Unfortunately, financial literacy is not in the curriculum at most schools. In my experience raising two college-aged children and with two stepchildren just entering elementary school, I can say with great confidence that more formal financial education would be good for kids and parents alike.
So how can parents fill the gap and help their kids pick up the skills and knowledge they need to make good financial decisions throughout their lives?
“Are we rich?” When kids ask about money
First and foremost, parents must be willing to discuss financial matters. Even among highly successful people and wealthy families, we see a reluctance to have these important discussions. Often, the hesitation arises from a fear of facing uncomfortable questions from children or an impulse to protect children from being considered different or wealthier than their friends. Of course, kids are naturally curious about everything, including potentially sensitive topics. They may ask if the family is rich, how much Mom or Dad makes or about the cost of a home or vehicle. There are no easy or perfect answers to these questions. But in my experience, asking your kids why they want to know often triggers positive conversations and helps you figure out how much your kids know and what they’re hearing from friends.
Secondly, parents must recognize that a good financial education starts at a very early age, say three or four years old. If that sounds too young, consider that many experts believe that the right time to start teaching kids about money is when they first show interest in it. That’s why a regular allowance, starting at a young age, is a great way to acclimate children to financial basics and show that money is just part of life.
Saving, spending and giving should start early
Creating separate jars or piggy banks for saving, spending and giving is an increasingly popular strategy for helping kids understand that money has different purposes and that they have to make decisions about how they spend it. For instance, saving for a special toy can help children recognize the importance of goal setting, budgeting and the difference between wants and needs.
Clear jars are particularly effective because kids can see the money physically grow as it accumulates. That adds to the fun, especially if they physically remove the bills and coins to count it or to take it off to the toy store to complete these very memorable transactions! Of course, it doesn’t have to be a jar; our seven-year-old son prefers a clear bag, like a large Zip-Loc, because it’s easier to carry.
Putting some money in a “giving” or “sharing” jar can help kids learn about the value of helping others or supporting community service organizations. In this way, they can begin to see the connection between money and the family’s values.
Still, money is a tough concept for young children to grasp. Recently, our little boy told me that he could buy a car. When I asked for more information, he explained that he’d seen an advertisement offering a car for $169 and then proudly pointed out that he’d saved more than $200! I explained that $169 was the cost for one month, which probably still seemed like a good deal to him, since he loves cars. Even when questions seem silly and awkward, they are “teachable moments” and occur at many ages.
Through financial adolescence to money maturity
As children move into middle school, opening and managing a savings account can help them understand basic banking concepts, like interest and the need for “rainy day” funds. This is also a good time to consider adding household chores and responsibilities as a way to increase the allowance. Informal part-time jobs, like baby sitting or lawn mowing, may help kids make the clear connection between hard work and financial rewards. Never underestimate the power of lemonade stands to inspire future entrepreneurs!
Heading into high school and college, the conversations about money will be deeper and more sophisticated. Certainly, your child’s first exposure to a credit card should not be when they leave for college, a lesson that many parents learn painfully and too late. Remember – parents should teach kids, not vice versa! High schoolers who assume responsibility for a checking account and debit or credit card will have better financial skills when they go away to college.
Speaking of college, there are few better opportunities to teach your kids good financial habits. There are important financial implications to all of the big questions – from which school to attend and what to study to who will pay and whether part-time jobs or scholarships make sense. You can show them the various options for saving to meet college expenses, help them develop a budget and clarify your expectations for their responsibilities. For more ideas, see our conversation guide for students and parents for more detail.
The importance of establishing good credit is another lesson suitable for college students. When my son went off to college, I added him to my own credit card, which gave me direct oversight of his purchases, but didn’t establish his credit. So when he went off to graduate school, his credit card application was denied and I had to co-sign. Now that my daughter has entered college, I’ve taken a different approach, recognizing that each child will take a different path to financial responsibility and independence. It’s also worth noting that the rules evolve over time: today, more credit card issuers will report information about authorized users to the credit bureaus, so you may be able to oversee your child’s spending and build up their credit at the same time.
Resources to help with money conversations
Even if we wish more schools offered basic financial education classes, there are many resources for parents. We highly recommend “The Opposite of Spoiled,” by Ron Lieber, as a great resource for having meaningful “money conversations” and for raising fiscally responsible children. The book is full of good ideas and useful tips for addressing financial issues at different ages. Truepoint’s Ryan Klekar and Alexandra Ollinger wrote about five of his best lessons for raising kids who are smart, generous and grounded about money.
Some of our favorite digital resources include:
Financial education for a lifetime
“How do we make sure our children learn to make good decisions about money?” That is among the questions we hear most frequently from our clients, especially from families seeking to preserve multi-generational wealth. It all starts with open, honest and age-appropriate conversations about money.
The good news is that, regular discussions and active engagement with your child will remove some of the stigma and discomfort many of us feel in talking about money. In other words, it gets easier the more knowledge you share and, like a good education generally, you’ll set them up for a lifetime of learning.