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When it comes to money management, practice really does make perfect. Start teaching your kids about money by taking an active role in their financial education and demonstrating the importance of saving. You can create activities based on their limited “income,” and exemplify the practices yourself, to help ensure your kids will have a solid foundation for financial success.
While talking about money can feel uncomfortable, children who don’t receive financial education from their parents can be left trying to figure things out on their own.
Yulin Lee, who runs a financial coaching service that helps women achieve financial independence, decided to be, “intentional about educating my children with positive mindsets and habits around money.” She worked as a mortgage consultant and financial advisor for years and often dealt with clients who struggled with money. She believes this can be the result of inadequate financial education as children.
Lee started talking to her daughter, Maddie, and her son, Cameron, about money when they were aged 8 and 5, respectively, and received money for birthdays and holidays. “I instilled in them the idea of planning,” she says. “We split the money into five envelopes for: savings, projects, education, charity and fun.” In the beginning, the money got split evenly to simplify the math, but over time the children—with parental guidance—decided how to divide their income. Lee deposited their savings-category funds into the savings accounts she opened for them.
Jon Sharpe, a financial blogger and founder of Be Net Worthy, used a similar approach to teach his kids about money. Starting when they were in elementary school, he gave them each a dollar, in 10 dimes, every week. They decorated four containers with spending, saving, investing and donating labels, and each week would put seven dimes into spending, and one each into the other categories. At the end of the year, the children would pick a charity and Sharpe would match their donation—a practice that continues today.
“I have had savings accounts set up for each of them since shortly after their allowances started,” Sharpe says, “I started sharing the interest they were getting every month once it started to accrue.”
Setting a good example as you teach your kids about money can go a long way.
As you teach your kids about money, try to keep your lessons relevant to your child’s age. Focusing on how to divide gift or allowance money is a good start at an age of 5 or 6, and the lessons can build from there. When Lee’s daughter turned 16 and started a part-time job, for example, it prompted a conversation about taxes. Lee also helped Maddie open an online bank account where she can deposit paychecks and is discussing using multiple accounts to emulate their envelope system.
As children start to get into a savings groove, some parents encourage the behavior by offering to contribute the equivalent of a high interest rate to their kids’ savings funds. Increasing your children’s savings by 5 percent a month could help them understand how interest works and the power of compounding interest over time. It also satisfies a child’s desire to “see the results.” Once they saw how interest could increase their savings, Sharpe’s kids didn’t need the extra incentive. “They loved seeing that every month, even when it was just a penny,” he says.
You can continue to teach your kids about money when they head off to high school or college by using new situations and challenges to prompt discussions of more complex topics. This is the time to talk about saving and paying for college, as well as building credit, all of which can impact a child’s finances when he or she leaves the nest. Starting a first job in the real world might call for a deeper dive into taxes, including a discussion of employer benefits and tax-advantaged retirement accounts.
As you might expect, not every child will have the same reaction to your lessons. Both of Sharpe’s children continue to divide everything they earn into the same categories, although their savings rates vary. Anna, who’s now 16, increased her savings rate to 50 percent of everything she makes while Eric, who’s 14, stays closer to the original 70/10/10/10 split.
Lee also observed differences as her children grew older. Cameron, her son, started looking for ways to shift money toward “fun spending,” and he argued that gift money from holidays or birthdays should be able to go exclusively into his discretionary fund. Lee stood firm and showed him how sticking to the plan (putting some cash into savings and other budget categories) could impact his future finances. “He was impressed with the numbers, which helped him to stay with the system,” she says.
Creating interactive money lessons for children can help instill good financial habits, and starting that education from a young age is key. As you continue to tailor your lessons to your children’s needs and circumstances as they grow older, try to exemplify good habits in your own money management. Setting a good example as you teach your kids about money can go a long way as financial skills are learned and practiced over time.
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