If you want your children to develop sound financial management habits, you’ll very likely need to take that education into your own hands. Only 17 states in America require any financial course in high school. And with 1 in 4 people losing over $30,000 due to poor money management during the course of their life, the pressure is certainly on [you].
The good news is there are plenty of opportunities to teach your kids financial responsibility while raising your family. The sooner you start teaching them, the better prepared they will be when they’re solely responsible for their own money decisions and their own family’s financial well-being.
We’ve put together this guide to arm parents with ideas and resources to help you instill good financial habits and provide your kids with the solid financial foundation they’ll need to succeed in the real world. In this guide, we’ll discuss:
- How Much Does Today’s Younger Generation Know About Finance?
- Teach By Example
- When Can You Start?
- Teaching Opportunities Around Every Corner
- Using Allowances to Instill Sound Financial Habits
- Teaching Your Kids About Budgeting
- Instill Lifelong Habits
- Additional Finance Education Resources
How Much Does Today’s Younger Generation Know About Finance?
To gain some insight into what today’s younger generation knows about finance, we asked 507 survey respondents between the ages of 18 and 34 years old to answer a series of questions about important financial matters. The results offer a glimpse into what youngsters are learning at home and in school, as well as how prepared young adults are based on their prior education (from parents, mentors, and educators) upon entering the real-world post high school or college graduation. More than one-third (37.3%) of respondents are between the ages of 25 and 34, while 62.5% of respondents are between the ages of 18 and 24. We created the infographic below to illustrate our findings:
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One of the biggest personal finance concerns facing many members of the younger generation is the use of credit cards. Naturally, we wanted to find out how many survey respondents have credit cards and how much they know about how credit cards work – such as interest rates and annual percentage rate.
While nearly 8 out of 10 respondents say they have a credit card, more than one-fourth (25.9%) reported that they expect to pay nothing in interest on outstanding balances or have no idea how much someone should expect to pay in interest.
The good news is more than two-thirds of survey respondents (67.9%) reported that they know that APR stands for annual percentage rate. However, remember that 77.1% of survey respondents said that they have a credit card, meaning that at least some of our survey participants have a credit card but aren’t familiar with what APR means – and that can spell potential trouble if they don’t pay off their credit cards each month.
We also asked respondents about their knowledge of other finance-related topics, such as APRs, their savings habits, and retirement planning. Read on to learn more about our findings, their implications, and what you can start doing today to start preparing your kids for a sound financial future.
Teach By Example
Money may still be a taboo topic in mixed company, but in order to teach your children how to manage it, you’ll have to make sure that taboo does not extend to your children. If you want your children to be good with money, you’ll have to show them how to be so. Which means you can’t spend money frivolously and skip a car insurance payment. Nor can you put it all on your credit card and pay merely the minimum payment each month.
You should let them see you make financial decisions that make your family’s life a more secure one. Let them know the stuff you want and don’t buy. Tell them how badly you’d like to go to the movies on a date night, but you’d rather save the money the movie and babysitter would cost and put that toward your family vacation. Once they understand the concept of “less than, greater than and equal to” you can even include specifics. Tell them when you see a preview for a movie you’d like to watch, “Mommy wants to go see a movie and grab dinner with daddy, but that would cost about $150 and that’s more than a night in our hotel next vacation.”
Talk to your children about saving for the future, as well. In our survey, less than half of all respondents (47.4%) said that they contribute more than five percent (5%) of their income to savings. Nearly one-third (32%) said that they contribute between one percent and five percent (1-5%) of their income to savings, while more than one-fifth (20.6%) reported saving none of their income at all.
Not only is a savings account important for covering unexpected expenses, such as vehicle repairs or an insurance deductible for a medical procedure, but it’s also imperative to start saving early for retirement. We also asked survey respondents about their use of the two most popular retirement savings accounts, 401ks and IRAs. Out of 507 respondents between the ages of 18 and 34, more than half (60.3%) said that they do not have a 401k or an IRA, while 39.7% indicated that they do.
If you talk openly about the need to contribute a portion of your income to the family’s rainy day fund or emergency savings account, as well as your contributions to a 401k or IRA to plan for retirement, your children will be familiar with these concepts and they’re often more likely to start utilizing these financial vehicles early if they’re taught that they’re a necessity from a young age. There are even kid-friendly IRAs these days, allowing kids to start saving with money they earn through a part-time job over the summer or other means, and parents can also contribute on their child’s behalf.
Other savings vehicles and investment opportunities include options such as index funds and mutual funds. Index funds are often used as a core portfolio for 401ks and IRAs and are considered a form of passive investment, while mutual funds are actively managed. According to The Motley Fool, these terms are typically used to describe the objective of an investment: index funds aim to match an index’s return (before fees), while mutual funds aim to beat the market’s performance. According to our survey, 72.8% of respondents don’t know the difference between the two.
They may sound like stock broker-speak, but understanding these concepts is imperative for anyone who wants to invest for their future. And, both are used as a component of (or in some cases, in conjunction with) the 401k retirement plans that are popular retirement savings vehicles today. If you’re not knowledgeable about these concepts and how they work yourself, you can learn along with your kids while you prepare them for a secure financial future.
Speaking of your own financial education, if you think you need some tips on getting your own finances straight before you feel comfortable “Teaching by Example,” you may find your bank offers free financial advice. Spend some time talking to someone about your plan and make sure you have a budget and a plan. (And let your kid know you’re doing it so they see the effort it takes to get your finances in order.)
There are a few websites that will help you build your own budget, should you need. Mint is a free resource or you can pay for a couple more all-encompassing resources, YNAB (You Need A Budget) or Quicken. And even if you’re not comfortable using an online source, Microsoft Excel comes with a budget template that will help you get started. If you do it on your own, avoid the most common mistake in creating a budget: Don’t prescribe your budget; describe it. That is to say, you shouldn’t write out what you think you should be spending, write out what you do. Consult at least your last three months of spending and be realistic.
When Can You Start?
“The sooner the better” is the sentiment shared by all financial advisers, sure. But realistically, what can you teach and when? Forbes has a good breakdown of appropriate concepts by age, and the Parents site has another good breakdown of age-appropriate financial concepts.
The ideal age to start familiarizing your child with financial management concepts is, believe it or not, the toddler years. You can plan to start to teach basic finance concepts to your 3 year old without too much trouble. At that point, they’re old enough to understand money is exchanged for goods and services. They can also grasp the difference between need and want, so it’s also a great time to introduce the concept of waiting on wants and prioritizing needs.
You can, and should, incorporate money into the play of a toddler and build on those ideas as your child grows. Play store with your toddler, play monopoly with your school-aged children, or put your teen in charge of the yard sale cash register. But more than just these specific scenarios, you should make sure your child is exposed to financial concepts in their day-to-day lives, no matter their age.
Teaching Opportunities Around Every Corner
If the idea of incorporating some sort of educational financial discussion into your kids’ lives every day seems a bit overwhelming, here’s the good news: you probably already do. That’s because many of the things you’re already doing are related to money or finance in some way, so all you really need to do is start being more aware of those opportunities and being more open with your kids about what’s going on and why. Here are a few such opportunities that make it easy to start teaching your kids about basic financial concepts.
In the Grocery Store
If you buy store-brand products to save a dollar or two here and there, explain to your kids why you’re making those decisions. “This brand is a dollar cheaper, and it is made of the same ingredients.” Or, “We buy the name brand of this because it tastes a bit better, and it’s worth the extra dollar to us.” You should also explain why you go to some stores for some things and other stores for different items. “Wal-Mart has the best deals on dry goods, but the local grocery has better quality and/or deals for produce and meats.”
Make sure your kids don’t think there’s just a mail fairy that brings you all the items you get on your doorstep. Tell them you’re still spending money, just online instead of in a retail store, and that you pay shipping costs for the convenience. (Or how much your Amazon Prime membership costs annually.)
Mortgage, Car Payment, Bills, and Netflix
When you buy something or pay for a service online or send in a check – make sure they see it. It’s important they know what costs money (that is, of course, everything). Explain that we don’t leave the TV on when we’re not in the room because it consumes electricity, and we pay for the exact amount of electricity that we use. If your kid is a Netflix-obsessed kinda kid, and you are so inclined, you may even have them pay at least a portion of the Netflix out of their allowance.
When Things Break
This is a tricky situation for a lot of people because emergencies often mean falling on hard times. You don’t want your children to worry or know when you’re struggling. Let them maintain their innocence without making them worry. You can let them know exactly how you’re taking care of the problem without letting them know it’s a real concern. One way to avoid the undue stress is to avoid telling them about the specifics of the problem until you have a plan. When your furnace breaks and you don’t have the money saved, let them know about your new credit card and how you’ll have to pay the money back over time with interest (which plenty of people do, and they should be exposed to that, as well).
Of course, you want your kids to be armed with knowledge about how credit cards work so that they can avoid getting themselves in financial hot water by racking up credit card debt that they can’t afford to pay off. (Remember, nearly 8 out of 10 respondents to our survey say they have a credit card, but 25.9% say they’d expect to pay little or no interest – or that they have no idea how much they’d expect to pay in interest – on outstanding credit card balances.
So, when you use your credit card, you’ll need to make sure your kids understand that it isn’t just free money. You will need to explain why you’re using the credit card. Whether it’s for emergencies or you pay it off every month to avoid the interest rates, make sure they know there are trade-offs. If your credit card company gives you points per dollar or other rewards, explain that exchange. You get points or some other reward for using the card, although these rewards are best used strategically – in other words, it doesn’t make sense to spend a bunch of money just to earn a reward that would have cost less to simply purchase it yourself. On the other hand, earning rewards for purchases you’d need to make anyway can be a savings strategy for some families.
You may even consider offering them a Mom/Dad credit account, where they accumulate interest on any loan they ask of you. You’ll want to make sure it’s a small loan and that they make monthly/weekly payments until it’s paid off. You should probably use this sparingly and only for an older kid who has already illustrated knowledge of the underlying concepts of borrowing and interest. This could also be a good first-hand experience for your child to see that paying just the minimum payment is usually a bad idea.
This is hopefully a hypothetical explanation you’ll need to tackle with your kids. You can explain that if they were to fall and hurt themselves, you’d only have to pay a co-pay because you pay a monthly premium in exchange for health insurance coverage. You can mention that a broken leg costs over $10,000, but you’d just pay a fraction of that, while the insurance would pay the rest. But if they benefit a bit better from specifics rather than a hypothetical scenario, dental insurance is probably a good place to start – your whole family needs a dental checkup and cleaning every six months, so there’s no need to wait for a medical need to arise. While dental insurance plans vary substantially in what they do and don’t cover, most dental plans will cover at least a portion of regular preventative care, including those 6-month checkups.
Using Allowances to Instill Sound Financial Habits
When it comes to teaching basic financial concepts, giving your kids an allowance may seem like you’re handing over free money that won’t really teach your kids a thing about finances. But an allowance is actually an ideal way to give them hands-on experience putting financial concepts to work. Here are a few tips to help you use allowances to your advantage to instill good financial habits in your kids.
For Above and Beyond
You don’t want to give an allowance to your child for just existing, or even being responsible enough to do the chores they’re expected to do. No one pays you to do your dishes, either. Being part of a family means you pull your weight and help take care of each other. Getting paid is for tasks that require an extra effort.
Treat the beginning of an allowance as you would if you were hiring them for a job. Make it clear to them from the beginning the tasks they should accomplish and how much you’re willing to pay for that work. If they’re willing to accept the job, great! Make it clear from the get-go, though, that if they take a few days off, they don’t get paid vacation. They have to actually do the tasks they agreed to do in order to get the money you agreed to pay them.
How Much Should You Give Your Child?
The general consensus is to give your child roughly $1 per week per year of life. For example, a 5 year old (who, again, does more than just her expected chores) would get $5 each week. Keep in mind that each raise they get, their responsibilities should go up, as well – just like in a real job. If you want some ideas for age appropriate chores, Focus on the Family has a good list of suitable ideas.
There are, of course, other schools of thought. There is an independent contractor type of pay; that is, they get paid a set amount for each specific task. $1 for mopping the kitchen, $3 for cleaning the toilets – you can set the reward based on how much you hate doing a task and how much you’re willing to pay your kid to do them for you.
If you find yourself thinking, “I didn’t make that much when I was their age,” KidsandMoney.com offers a convenient calculator for inflation. (Heads-up for those of us that didn’t get an allowance, though: the inflated rate of 0 is still 0.)
Divide Allowance into Spend, Save, and Give
The hardest, but most important, part of teaching a child to be financially responsible is teaching them to avoid spontaneity when making purchases. Once they understand the concept that money buys things they want, that money tends to burn a hole in their little pockets. But it’s important that they learn that delayed gratification will get them something even better in the long run.
This also provides an opportunity you won’t want to pass up: instilling desirable values in them, such as teaching them that saving will provide them financial security later in life when they need bigger-ticket items. Teens should be saving for a car, concert tickets, or other things they want that you can’t (or choose not to) provide for them.
You can also use this opportunity to teach them about charitable giving and helping those less fortunate. Allow them to pick a charity they feel a fondness for so that giving is more meaningful. This may require exploration, but the payoff is worth it to not have to fight with them each time they have to divide their money. If they’re interested in pets, find an animal shelter they may want to give to (and possibly volunteer at if they want and you have the time to help out with that). You can also have them use that money to purchase items for women’s shelters or food for a food bank. They can even save their “Give” money and sponsor a family for Christmas.
Encourage Age Appropriate Side Jobs
You may want to make mention a few side jobs they can pick up, if applicable. Obviously a 5 year old’s only source of income will be the allowance you provide, but your 10 year old can likely make a bit of extra cash walking the neighbor’s dog or doing odd jobs for friends and family. And your 14 year old can invest her savings into a CPR class that will make her a more desired babysitter. In fact, that is a perfect example of how to earn a raise or to make yourself a better employee. And it’s important to let them know that the better they do at these jobs, the more jobs they will receive. It will teach them that building a solid reputation as an employee will make them more employable. The Mint offers some more ideas for kids to earn some extra cash.
Teaching Your Kids About Budgeting
Show Them Your Budget
If you’re not comfortable with them knowing exact numbers, or they’re too young to understand them, don’t spend a lot of time dwelling on your budget. But let them know that you’ve spent a lot of time creating your budget to ensure that your family has the funds needed to cover monthly bills and other expenses. Make sure they know that it’s worth spending time on. When your budget needs work, or you and your spouse need to rework the budget, let them know that you need the time to do that. Protecting them from your financial worries is a good idea, but let them know that achieving goals, even financial ones, takes work. There are no shortcuts that can replace the use of a solid budget.
Create a Budget with Them for a Specific, Realistic Goal
This is a great way to get started in teaching your children the work that goes into achieving financial goals. Allow them to pick something very specific (and not unrealistic) and set up a budget with them so that every week they get closer to that goal. For example, if they want a specific toy, set it up so that they save a few dollars every week until they can purchase it.
Make sure that the item they’re saving for is a realistic one. You want to set them up for success, not failure. That means they shouldn’t be saving for a pony (unless you live on a farm, you know how to get one cheap, and you want them to have a pony). Try to set the budget so they’ll reach their goal in a couple months or less. Your goal may be to teach them delayed gratification, but keep in mind children have a finite amount of patience.
Instill Lifelong Habits
Teaching your kids about finance doesn’t stop once they’ve learned the basics. In fact, you’ll want to encourage good financial habits throughout their childhood and adolescence. Whether it’s encouraging your teen to take a part-time job at the local movie theater or fast food restaurant, working with your kid to develop a plan to earn or save enough money for those coveted concert tickets, or helping them draft a budget to meet a long-term financial goal, there are many ways to continue encouraging positive financial practices.
When your child is old enough to understand not just the basics of budgeting but also the importance of savings, you may want to consider instituting a “Mom/Dad Match” up to 25% (or whatever figure you can afford or deem fair) for their long term savings, just like a job with good benefits would institute for a retirement account. You’ll want to make sure to only do this if they already understand the vitally crucial point of work = money. You don’t want to do a mom/dad matching benefit too early and risk encouraging the development of a sense of entitlement later on.
Additional Finance Education Resources
If you do your budgeting online, you may already be familiar with The Mint. But what you may not know is that they actually have a pretty thorough kid-friendly portion of their site that allows children and teens to participate in activities to learn how to budget, how to save, and so much more. There are tutorials for teens to write a check, debt calculators, and even fun little quizzes and games for the younger crowd. You can find a list of activities, games, and articles on their site for not only kids and teens, but you as the parent and even teachers, as well.
Hands on Banking offers an online course that is designed for children to begin to understand the basics of finance. The kids’ course offered here, uses cartoon alien characters who are learning the strange ways of money on our planet. They go over banking, budgeting, credit, savings and finish with an assessment (a quiz) that will give them a certificate of completion. Beware, there are some math problems in the assessments, so it’s probably best for an adult to assist.
Once they’re a bit older (teens, most likely, unless you have a child that takes a strong interest), you can introduce them to investments and allow them to play with a mock investment portfolio. This should teach them exactly how hard it is to become a millionaire with investments, but that it is possible to do well and save for a financially secure retirement. It will show them that investing early will be most beneficial and that high risks only sometimes equal high reward. And learning that with fake money is definitely preferable. You can find an investment simulator at Investopedia and you can sign up to play for free.
Other great financial resources for kids and teens (and mom or dad wanting to teach their kids good financial habits) to check out include:
- Finance in the Classroom
- 15 fun financial literacy crafts for kids
- 6 Banking Activities for Kids: Making Financial Literacy Fun
- Games to Teach Financial Literacy
- Resources for Teaching Financial Literacy
- Money Smart for Young People
- 9 Ways to Teach Teenagers About Money
- Tips to Teach Your Kids about Smart Money Management
- 10 Money Lessons To Teach Your Kids Before They Turn 10
- 7 Ways Smart Parents Teach Their Kids About Money