Do you know how to teach your kids about money? Think back to your childhood. Who taught you how to manage money?
Who taught you to write a check? Who explained what compound interest is?
You may have learned to write a check in Life Skills class in school or perhaps Mom and Dad showed you.
And your parents may have even taught you to manage money. But it could be guessed that no one explained the more complicated stuff like compound interest.
Heck, could you even explain it to your kids now? And yet, in many ways, our lives revolve around money.
It allows us to keep our lights on, a roof over our heads reduces anxiety and puts food on the table.
And being taught to be responsible with your money will set you up for long-term success.
But where do you start when teaching your kids about money? And what is most important for your kids to know and understand?
Below is a brief guide on how to teach your kids about money and hope it helps with your own family.
Give commissions, not allowances
This is a tip from author and finance expert Dave Ramsey.
The problem with an allowance, as Dave explains, is that you’re just handing kids money for doing nothing. If you make the money contingent on doing chores around the house, you help develop their inner drive.
You can even set a dollar amount per chore so that if they only do some of their chores and not others, they get paid accordingly.
And, of course, chores must be age appropriate.
Dave explains, “When they are 6, they may help match socks in the laundry. When they are 12, they may be expected to empty the dishwasher. The older they become the more responsibility they can handle, the more chores they can take on, which in turn means making more money.”
Teach kids to manage money
For kids (and many adults), it can be really hard to hold onto money when there are things they know they want.
But it’s really important to teach them that before money can be spent, it must be saved.
As Warren Buffet said, “Don’t save what is left after spending, but spend what is left after saving.”
If your kids are young, give them three envelopes, one for spending, one for saving and one for giving. Have a payday once per week where you help them divide the money into the different envelopes.
If your kids are older and have bank accounts, you may want to do this electronically, sorting the money into different accounts automatically online.
That said, it’s important to start with physical money. It can be harder for younger kids to grasp that they’re accumulating money when it’s sitting in a bank account.
Teach goal setting
As I said, for many kids, the impulse to rush right out and buy something the moment they get paid can be really strong.
But, encourage them to set BIG GOALS for what they want to buy. Delaying the pleasure is a sign of development and maturity.
They’ll also experience a lot of pride when they hit those goals. (Which will lead them to want to set more big goals.)
In Dave’s family, “saving started to get serious when we announced to our children that we would not be buying cars for our teenagers, nor would we allow them to buy a car on credit.
Since we have been blessed financially, we instituted 401DAVE for their cars, matching their savings dollar for dollar.”
While matching your kids’ savings dollar-for-dollar on a car may not be an option, do sit with them and come up with some ambitious goals (and possibly even some you can work on together).
Create a teen ‘emergency fund’
Just as you, Mom and Dad, should have an emergency fund for any unexpected storms, your teenager should have his or her own emergency fund.
This money will come in handy if your teen’s car needs a new tire, a cell phone gets lost and needs to be replaced, or something is accidentally broken.
The general rule of thumb is to have a minimum of three months of expenses saved. Others feel more comfortable with 12 months of expenses. However, for a teenager, it’s a good idea to have at least $500 set aside for the “just in case.”
This may not be something that every parent can do, but if you can, it is a good way to encourage savings.
Just as employers often match employee contributions to a 401K, parents could match savings dollar-for-dollar.
However, just as employers put a cap on their contribution, you might want to put a cap on your own contribution. (Or Christmas and birthdays could get extremely expensive.)
When your kids are starting to accumulate a significant amount of savings, it’s a good idea to introduce the idea of investing. (Especially with teens!)
You may even want to set up a fourth bucket to put their money into, a bucket for investing. Once there’s enough money in that account, it’s time to start looking at investment opportunities.
You can set up a free Robin Hood account or go through your own financial advisor.
Advisors typically agree that it’s best to start with brands that your kids know and use. Encourage them to research the companies so that they become familiar with the company websites and annual reports.
Doing so will help them understand that if they’re buying more of those products, they’re supporting the company. Which in turn will help support their own stocks.
Discuss market trends with them and when and why it might be a good idea to sell. It’s also important to explain high- and low-risk investing (stocks versus bonds). And if they’re saving for college or a car, you might want to allocate some funds into a more stable bond.
Once your kids are comfortable with the idea of trading, it’s time to introduce kids to the idea of compound interest. While “interest” is a concept most of us easily understand, compound interest is a little more challenging to explain.
The Penny Hoarder gives a great example of how to explain the concept.
Understanding compound interest will make it easier to explain why it’s so important to start saving early for retirement.
Final Thoughts on How to Teach your Kids about Money
Many parents are hesitant to teach their kids about money.
Perhaps because they don’t understand everything (like investing) themselves or because they’ve made their own bad decisions where money is concerned.
However, with your kids, it’s a chance to “get it right.”
Teaching kids about finances and how to manage their money properly will have a huge impact on their lifelong success and, fortunately, today there are a multitude of resources to help you figure it out as you go.
So here’s you 6 simple solutions on how to teach your kids about money:
- Give Commissions, Not Allowances
- Teach Kids to Manage Money the Warren Buffet Way
- Teach Goal Setting
- Create a Teen Emergency Fund
- Match Savings
- Introduce Investing with Robinhood (not Robin Hood)