Teaching Children About Money

Situation

We are a young couple with two children and would like to start teaching them about money. How can we start teaching them some basics and hopefully instill some good financial habits?

Suggestion

It is never too early or too late to the conversation about money. Here are a few ideas that may help start your child on the road to being financially responsible.

Young children

It is never too early to start helping children develop a healthy respect for money and to help them develop some good financial habits. Using an allowance can be helpful if it does the right things. If your objective is to teach the basics, consider the following:

• Set a weekly allowance to match the age of the child - a five year old gets $5.00.
• Tie the allowance to some required chores - setting the table for dinner.
• Divide the allowance into three spending categories - 1/3 for immediate spending, 1/3 saved for some specific near-term purchase (like a small new toy) and 1/3 for a longer-term goal (like a major new toy).

Teenagers

This is often the most difficult time for children to deal with financial issues. Peer pressure and the growing realization that they cannot have everything they want can add tension to any conversation about finances. It is also the time when children can start understanding more involved financial issues and when financial habits are formed.

The allowance approach gets complicated in the teenage years as the costs of items they want goes up. Now could be the time to discuss how a job could help them afford the things they want. An after-school or summer job can be an ideal way for children to learn that money is earned, and not something that mom or dad will always provide. A job can also teach children about responsibility since their employer will be relying on them to be present and punctual. If an outside job is not possible, consider paying them an hourly rate for more chores and insist they treat it as a job.

Helping the child establish a checking account, or even preparing their own tax return, will go a long way to helping them understand that money is a serious matter and that someday they will need to be self-sufficient and make their own financial decisions.

Set a good example and keep the conversation going

Children learn a lot from their parents. If your children see you making wise financial choices, they will be more likely to follow your lead.

Be open to discussing finances with your children. Children are curious about what they see their parents doing and you can turn that curiosity into teaching opportunities. The conversations must certainly be age appropriate, but when your child sees you writing checks is an ideal time to start talking about the importance of paying bills and balancing your budget. A stock market report on TV can lead to a more serious discussion about money and long-term financial goals.

Take advantage of these opportunities and by the time your child is ready to leave home, they will have a foundation to better prepare themselves for their financial future.