by Josh Frankel, CFP®
Principal
Portfolio and Wealth Management West Bearing Investments
According to a 2013 study from the University of Cambridge, money habits are formed from 0 to 7 years of age, and once the habits are formed, it can be difficult to change that behavior later in life.
Despite the results of this study, there is never a wrong time to teach your child about healthy money habits. Below are tips to help kids learn about money at a young age. While there are undoubtedly more strategies to help kids learn about money, this list is intended to serve as a starting point and to provide a general overview of basic money management.
Pre-School and Kindergarten
Even at a young age, many experts believe that teaching kids about money will help create healthy habits. Obviously, this doesn’t need to be a John Maynard Keynes lecture about economics! For young children, they mostly need to have a basic understanding that money can be exchanged for goods and services.
Use a piggy bank or clear jar. My 6-year-old doesn’t really understand the value of money, but he sure appreciates the concept of accumulation as his piggy bank becomes full. Some experts recommend a clear jar so kids can see the growth of their savings. Either way, a piggy bank or clear jar is a great way to introduce young kids to the value of saving.
Let them pay with their own money. Start small with a trip to the local farmers market, grocery store, or even a dollar store. By using their own money to pay (in cash or coins), they will learn what money can be used for, and about the coins/bills used to pay. Hands-on learning is effective and practical, even at a young age.
Talk to your kids about how money is used to support daily activities. Begin with needs such as food, gas and clothes. Kids will learn quickly that there is a cost to items your family consumes. This will help them begin to understand the true value of money.
Elementary School
As kids get older, you can begin to introduce slightly more advanced topics. In addition to the below ideas, kids are getting technology sooner than ever and it’s important they learn to navigate the web responsibly. When your child is around 11 to 12 years old, discussions about advertising, online ads, marketing and scams are important to have. It’s critical to teach safe habits online.
Introduce spending, savings and giving. As kids earn money, they should know there are three basic choices for them to consider. They can save, spend, or give.
Save: Teaching the importance of saving early is crucial to long term success. They can put savings into a separate piggy bank – or even open a bank account. For money they save, parents or guardians can pay modest interest to encourage the behavior. In the words of Warren Buffet, “Do not save what is left after spending but spend what is left after saving”.
Spend: Understanding the difference between wants and needs is a critical lesson at this age. It can feel as though everything is a need at a young age, so help kids learn the difference. This crucial skill will help them make smart choices with money in the future.
Give: Finally, depending on family values, the importance of giving to charity can also be introduced at this age. Even if it’s a dollar, they can learn the value of helping others.
Allow them to make decisions…and mistakes. As hard as this might be, kids will learn better by making their own decisions, even if their decisions lead to mistakes. As parents and guardians, we obviously don’t want kids to fail miserably, but small mistakes are an important part of growing-up. This allows them to learn while the consequences are still minor.
Give kids the opportunity to earn money. When it comes to day-to-day lessons, the best way to teach your kids the value of a dollar is to give them actual dollars. The money can come from allowance or extra chores around the house. There is much debate about whether kids should do chores for allowance; or if chores are part of household responsibility. There are pros and cons to both options and these decisions can be made by each family.
Middle School and High School
Teenagers will hopefully earn more responsibility as they get older. Parents and guardians are still most likely paying for most expenses, but teens may be earning their own money. While they are not yet fully in charge of their financial lives, this is a great time to emphasize that their financial future is ultimately their responsibility. They are now only a couple years away from potentially going to college or being out on their own. If your child experiences a financial setback when they’re young, it can be an opportunity for them to learn. And once they’re on their own, they may be better prepared to take responsibility for their financial life.
Making money. Many teens are ready to work. Help them figure out how to make money, whether it be babysitting, dog walking, serving ice cream or being a lifeguard. The benefits of earning money through hard work will serve these kids well in the future. Teens will learn in real time about saving, spending and giving. There’s also the benefit of having a “boss” and experiencing the “real world.” This is usually the age to open a first bank account, balance a checking account and learn how to navigate the banking system. In addition, they will get introduced to everyone’s favorite uncle, Sam.
Cost of living. Teach about the cost of living and household costs, including college costs and basic budgeting. This is where earning, spending, saving and giving all come together. Sticking to a budget and learning the costs of things will help kids better understand money management – and better prepare them for college. With the rising cost of college, it’s worth a conversation with teens about the costs of higher education. They should know what’s affordable when it comes to their college search – and if they will need to pursue student loans to attend the college of their choice.
Introduce them to investing. Kids understand brands at a young age. Allow your child to pick a company they like and help them purchase an investment. Another good option is opening a Roth IRA if your teen has earned income. Consider this scenario to illustrate the importance of starting young.
Scenario A: You save $2,000/year from 19-26; and save nothing from 27 to 65.
Scenario B: You save $0 from 19 to 26, but you invest $2,000/year from 27 to 65.
In scenario A, you’re only saving and investing for eight years; in the second, you’re saving and investing for 39 years. However, the person who starts at age 19 would end up with more money in their portfolio in the long run. Assuming a 10% annual rate of return, the first person would have $1.02 million by 65, while the second person would have $875,704. How is this possible? The miracle of compounding interest. Please note that this is a simplified scenario that assumes a stable rate of return and does not factor in market volatility or tax consequences. However, the main takeaway remains: saving more earlier in life will benefit you significantly by the time you are ready for retirement.
4. Debt: Explain how credit cards and debt work. Teens should gain an understanding of debt as they will undoubtedly encounter it in the form of student loans, car loans, credit card offers on campus, mortgages and more. A pre-paid debit card could serve as good practice for teens to use “plastic.”
This is by no means an exhaustive study of teaching kids about money, but hopefully provides a few key items to consider. Teaching children about money at any age can be challenging and it’s going to be a commitment. This also isn’t a one-size fits all as it will be different for every family. However, taking the time now to teach them when they are young will be worth it in the future.
Finally, here are a few resources if you would like to explore further:
Ferguson Wellman, Octavia Group and West Bearing do not provide tax, legal, insurance or medical advice. This material has been prepared for general educational and informational purposes only and not as a substitute for qualified counsel. You should consult qualified professionals to understand how this information may, or may not, apply specifically to you.