Over the past few years, I’ve posted a number of blogs on the topic of teaching kids about money. I’ve shared my own discoveries – as well as missteps – with my kids. In articles both recent and a few years old, I’ve provided advice for parents who aim to raise their children into financially stable adults. Because it’s such a worthwhile topic, I thought I’d take the opportunity to synthesize my advice from over the years – and add to it – in today’s post. Here are seven tips to help you give your kids a sound financial foundation.
1. Encourage active saving
There’s a distinct difference between active and passive saving, and that’s intention. Spending less than you earn (passive saving) is a good first step, but it’s unlikely going to get you all the way to your financial goals. Active saving is setting a goal and working diligently toward it. A way to get kids used to the idea of active saving is by having them use a Moonjar. A Moonjar has three compartments: Spend, Save, Share. This helps children recognize that we don’t just earn money to immediately spend it; it’s also about setting long-term goals as well as sharing with others in the form of charitable giving. Try having your child save for a big item like a bicycle. That’s about as long-term as it gets with kids!
2. Explain wants vs. needs
Even as adults, things we desperately want can feel like needs. You probably lump your cable or streaming bill into the utilities category even though it’s not a necessity like power and water. For children, it’s even more difficult to differentiate between a want and a need because you provide what they need. Try shifting the responsibility of one thing you would normally buy over to them. Explain that they have to make sure they have enough money for that item before they can think about the things they want to buy.
3. Let them make mistakes
Let me warn you: this is a tough one. You’re going to want to intervene and tell them that if they spend money on that toy racecar, they’re not going to have enough for the baseball glove they need for practice. It was hard for me to step back, but I learned I had to let them make mistakes. Of course, I set rules and limits around this – there are things they know they can’t buy – but a relatively bad decision shows them the real-time effects of poor money management. I remember thinking my son was being wasteful but it turned out to be the best use of that money. When the money wasn’t there for something he needed later on, a light bulb went on.
4. Practice what you preach
Your children are always watching. They’re picking up all sorts of cues from you that you’re not even aware of, so it’s important to model the behavior you’re trying to teach. Talk about your own money decisions with them. Explain how you earn money, how you spend it, how and why you save. Talk to them about your needs and wants so they can start to understand the difference. As they get older, you can add some subtlety. You might explain that families need a place to live, but you chose to spend more on your house because of the location or the school district.
5. Make it experiential
Learn by doing isn’t just a concept in economic theory; it’s a great way for your child to practice the money lessons you’ve been teaching. Give your child a wallet and a set amount of money, and let him or her manage everyday spending (not just saving for big or fun items). If they buy lunch at school, give them enough money for the week, and let them decide how to allocate it. Certainly, you’ll suggest that they divide it evenly between the five days. If they spend it too fast or on something else, they’ll learn very quickly about wants versus needs.
6. Make it fun
Practical, real-life money management is what kids need to succeed later in life, but it’s not the most exciting topic. If you can find a way to make it fun, they’ll be more likely to want to participate. One idea is giving them a debit card. Children love to play grown-up (or was that just me?), and yours have undoubtedly seen you plop down the plastic on plenty of occasions. The great news is there are all sorts of trainer debit cards such as prepaid or reloadable or even those that are linked to checking accounts. Review my “Money Lessons: Debit Cards for Kids” post to learn more about each option and decide if it’s right for your child.
7. Tailor your approach
Kids are ready to learn at different ages. You might think they’re not yet old enough to manage money, but observe their behavior. Are they getting frustrated that you give them money, then ask for the change and how they spent it, as my son was at 9? If so, it might be time to let them take some control. Trust me, I didn’t think 9 was old enough, but it turned out to be a good experience for him. Start with the basics when they’re young to set a foundation for this day. You might set rules about how to handle birthday cash such as insisting that they split it evenly between the Spend, Save and Share boxes. As they get older, the goals and lessons will change, but don’t lose sight of what makes sense to them. For example, even if your 13-year-old is making good progress saving and managing money, he or she still may not understand saving for college.
Dollars and cents add up – just like your advice. Talk to your kids about money openly and often, and they’re much more likely to make smarter budgeting and prioritization decisions when they’re on their own. When your kids are ready for that debit card, make sure you have a LegacyShield account to keep everything organized. It’s a safe and secure platform that allows you to keep track of your – and, now, your kid’s – financial life. After all, there are only so many usernames and passwords a person can remember.