The American education system does not spend a lot of time teaching kids about personal finance. A study found that only 37% of K-12 teachers had taken a college course offering personal finance information. In almost half of the states, less than 5% of students were required to take a stand-alone personal finance class.
Arguably the only thing more important than money knowledge is learning how to take care of your health. Since schools have abdicated the job, it is up to the parents. Teaching your kids good money habits is one of the most important things you can do for them.
It Is Never Too Early
A study found that by the time children reach the age of seven, they’ve already formed habits and ideas around money. It is possible to break bad habits and form new ones, but anyone who has been forced to do so knows it is not easy.
It will be much easier to make sure your kids develop good money habits from the beginning.
Talk About Money
Money is a taboo subject in most households, which is unfortunate. It is understandable if you keep financial difficulties from your children to keep them from worrying. But even if that is the case, children can pick up on tension and they are always listening so by keeping things from them, it is causing more stress. The unknown is scary.
You need not get into the nitty-gritty details but keeping money issues in the dark is a missed opportunity to teach your kids good money habits. There are plenty of instances where talking about money can happen naturally:
Shopping: Whether you are shopping for groceries, school supplies, or anything else, you can turn that into a money lesson. Create a mini budget for your shopping trip. Make a list so you only buy what you need. Look at online circulars to find the best prices. Look for coupons and discounts before heading to the store. Explain while shopping the importance of sticking to the list.
Paying Bills: I can remember my parents sitting down with their checkbooks and paying the monthly bills. Your children have probably never seen that as many of us pay bills using autopay. Let them sit with and watch you paying the bills, even if they are on autopay. You can explain that the house costs $X and the internet costs $X. Also explain that those bills must be paid by a certain date and the consequences of not doing so.
Allowance: Every family will have their own approach to allowances. Whatever that approach is, it is a good opportunity to talk about money. You earn money for doing things like chores and If you need more money, you can earn more by doing additional chores. This is especially important for children who are too young to have a job or side hustle.
Earning and Being Gifted Money: When children earn or are gifted money, they should not be able to spend 100% of it any way they choose. They should be allowed to spend some of it, but not the entire amount. One way to teach your kids good money habits is to require that the money be divided up with the GISS method. Give, Invest, Save, Spend.
Give means money towards charity, any charity the child chooses. This teaches them to help others. Invest means putting money aside for a long-term goal, maybe funding a 529 Plan to help pay for college. Save is for short-term goals, like a new bike. And Spend is money the child can spend as they like.
Make it a Game
There are plenty of games designed to teach children about money (and for a range of ages). Some of them are online and others are old-fashioned board games that the whole family can play together.
As your children enter their tweens, make sure one of the games you play with them is an investing simulator. Most of the games give players a certain amount of play money to invest and use almost real-time investing data.
If you want to really pique their interest, offer to open a custodial account once they reach a certain milestone in their simulator and let them take a crack at the real thing using their own money. Stockpile is great for this. It allows investors to buy fractional shares so kids can invest with small amounts of money. It allows family and friends to buy gift cards that can be redeemed on the site for stock. Kids can track their investments and place trades approved by a parent. They can also share a wish list of their favorite stocks with family and friends.
Be sure to teach kids who are playing these investing games about compound interest and how it relates to investing. Explain how wonderful it is when it is working in your favor and how bad it is when it’s working against you.
I do not love using cash because it is hard to track. However, if your kids never see you use cash, they have a warped idea of spending. Cash is finite, once it is gone, it is gone. Even very young children can understand that. If they only ever see you use a credit or debit card, it’s hard to understand that money is finite.
When you are making relatively small transactions (buying ice cream, picking up a few items at the grocery store), use cash. Even better, let your child hand the money to the person at the cash register and accept the change. Doing so makes spending money realistic to a child.
When your children are a bit older, explain what credit cards are and how to use them wisely. It is not a complicated explanation, “Don’t buy things you can’t afford and pay them off in full each month!” Again, explain how compounding interest works against them when it comes to credit card debt and how destructive they can be when not used well.
Wants vs. Needs
Because children’s needs are automatically provided by parents, they do not grasp the difference between wants and needs. Explain to children that there are things everyone must pay for because there are things we need (housing, food, clothing). We must make sure we have those things covered before we can think about spending money on anything else.
Explain Opportunity Costs
No one gets everything they want. Opportunity cost is a fancy way of saying that. If you buy a new pair of shoes, you will not have that money to buy a video game. Even young children can understand this concept.
Activities Not Things
This is a concept plenty of adults could use a lesson in. Teach by showing that happiness comes more from the things we do than the things we buy. I guarantee you that your children will remember things like going to a pumpkin patch or watching fireworks on the 4th of July before they remember the pile of gifts they received for their birthdays.
If you do not believe it, think back on some of your happy childhood memories. You remember the fishing trip with your dad, not the Play Station. Learning this makes children and families happier and less acquisitive.
Encourage Them to Earn Money
Many parents enroll their kids in tons of activities designed to help them in some way; tutoring, sports, music lessons, or dance lessons. But too many activities leave no room for one of the most helpful activities of all, earning money.
That can mean an age-appropriate side hustle like pet-sitting, lawn care, washing cars or a part-time job (when they are old enough). Working for money teaches kids plenty of invaluable lessons like marketing, interviewing, scheduling, or getting along with bosses and co-workers.
It Starts at Home
Financial education starts at home and often ends at home. If you do not take up the task of teaching your kids good money habits, they will have to learn the hard way. All parents want to help their children avoid the same mistakes they made, including financial mistakes. It is up to you, parents!
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
Stockpile is not affiliated with LPL Financial or Paradigm Wealth Partners.