Diana Kelly Levey

How to Raise Kids That Are Smart with Money

boy or girl learning about math and money

April 10, 2019 | Categories:

You might think your children are too young to think about finances—or that it’s too complex for them to understand—but chances are, they’re old enough to handle it, and you’re probably not discussing it enough. In fact, one of the biggest mistakes parents can make when it comes to raising kids who are savvy about money is to not bring it up at all.

“Some people grow up in a home where money is taboo—their parents just don’t discuss it,” says Rachel Cruze, co-author of Smart Money Smart Kids. “As a parent you have to realize that you’re training your child to become a great adult. In order to be a successful, they have to know how to handle money, and the best place for them to learn that is from the home. Don’t be afraid or intimidated by it. Talk to your kids about money.” Here’s how to get the conversation started.

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Our Cashless Society

When most of us were growing up, bills arrived in the mail and were paid and mailed back with a check. Your parents may have gone to a bank and deposited their paychecks. Credit cards weren’t widely accepted, or maybe they were just used for emergencies. We watched cash changing hands daily.

Today, many of us use little to no cash most of the time. “Many parents now do everything with credit or debit cards and pay bills online. Kids sometimes don’t even get to see money,” says Cruze.

That’s too bad, because the fewer opportunities your children have to see how money is both received and given, the harder it is for them to appreciate its value. “Cash transactions create teachable moments,” says Cruze. For example: You head to the supermarket to buy your weekly groceries, You pay in cash, and maybe even get some change, all of which your child sees at the checkout. Now think about when you simply swipe your credit card. Whether it’s for two items or 20, it all looks the same. So it’s difficult for your child to understand how much money you are spending.

Then there’s the fact that paying virtually rather than physically can also harm your budget. A 2008 paper published in the Journal of Experimental Psychology: Applied found people tend to overspend when using a credit card versus cash. “It’s more difficult to part with money when you’re physically counting out the bills. And that helps you make better, more careful decisions,” adds Kobliner.

Still not ready to give up your Apple Pay? That doesn’t mean you can’t turn this into a money lesson. If they’re old enough, explain to your kids what’s happening when you swipe your debit card or pay with your phone, suggests Cruze.  “Let them know, ‘This isn’t just magic money,’” Cruze says. “Make sure they see the bank in person and tell them, ‘There’s a bank that we pass on the way home. That’s where our money is.’ Have conversations and be much more intentional about it.”

The cash lesson is especially important when it’s your kids who are getting the money. “I really encourage parents to make an effort to use cash with kids—especially if you are giving them an allowance,” notes Beth Kobliner, author of Making Your Kid a Money Genius (Even If You’re Not). “There are apps out there that will let you pay an allowance to your kid in digital tokens or ‘beans.’ But giving your kids cash is the simplest and smartest way to go. It’s tangible and real in a way that you don’t get with any other form of money.”

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Start Young

We should start talking to our kids about money as soon as possible, says Kobliner. Kids can “get” basic money concepts like value and exchange by age 3.

“This sounds very young to a lot of people, but a three-year-old understands the cause and effect of working and getting paid,” adds Cruze. “By this age, kids might ask questions about money. Don’t shy away from that as a parent. Dig into the conversation when your kids bring up the topic of money.”

In fact, good money habits start early. “Research has shown that many good habits associated with money management skills are really solidified by age 7,” notes Kobliner. Of course, if your kids are already past that age, don’t stress—there are plenty of learning opportunities for older kids, too. “Take advantage of everyday teachable moments—like going to the grocery store with your fourth grader, and encouraging your middle schooler to save some of her babysitting money,” says Kobliner.  Other teachable money moments could be showing your child how you check the receipt after purchasing something before you leave the store, to make sure you weren’t charged incorrectly for something. Or, you could explain to your child why you prioritize certain items over others when you shop. You might explain why you bought the yogurt that’s on sale but then splurge for an item like organic chicken, suggests Kobliner.


Put It Into Practice

Keep looking for ways to teach your kids about money in daily transactions. “If you’re going shopping with your kid and she wants something that you know is going to blow your budget, use it as an opportunity to talk about financial trade-offs—‘You could buy the trendy shoes everyone wants, or you could buy two T-shirts, a pair of jeans, and a less-trendy shoes for the same amount,’” says Kobliner.

And keep up the dialogue. “Kids understand more information their parents give them credit for,” notes Cruze. “And if you’re not the one talking and teaching them about money, who will? The car dealer they meet when they’re 25 years old and trying to buy a brand new car? Or the bank? Or the credit card company? If it’s under your control, you have an advantage as the parent to really lift them up and help them understand the best choices they can make.”


Money Smarts at Every Age

Toddlers and preschoolers

Cruze recommends teaching toddlers about money by giving them a few coins for doing chores, like putting away toys or cleaning their room. “Tell them, ‘Congratulations. You just cleaned your room. Then you pay them instantly with physical money; a few cents for them to understand the concept of working and getting paid,” she says. “And at that age, you can use a clear plastic jar in their room where they can watch that money accumulate.”

By age 5, you can start doing more structured money lessons, adds Cruze. “Instead of just using that clear plastic jar, I tell people to use three envelopes and label them: giving, saving, and spending. Now, when the child gets paid each week, he or she can divide the money into those categories and can start saving up for something they want.”

“An most important money lesson for this age group to learn is how to wait—to become a well-adjusted person overall, not just so they’ll grow up to be better with money,” says Kobliner.

The takeaway here teaching your child to be patient, which can sometimes involve holding something back physically, like putting a toy they pulled off the store shelf back and telling them they’ll have to wait until their birthday or the holidays to get it. “Developing a sense of delayed gratification is bedrock when it comes to key money skills later in life, like saving and working to earn a living. Talk about things that you wait for: a turn at the swings, your birthday. Explain that we need to wait to buy things, too,” she says.

Elementary schoolers

“Now is a good time talk about the importance of saving, and why a bank is the safest place for your money,” notes Kobliner. If you haven’t already, open a savings account at your neighborhood bank (a real one, not a virtual version). A savings account can help teach your child about interest, fees and other important financial concepts. Look for one that limits fees and pays relatively higher interest rates (similar to a version you would open for yourself).  

If your kid is starting to spend a lot of time online, consider warning him or her about cybertheft. “This is a good time to stress how dangerous it can be to share personal information with strangers,” advises Kobliner.

Middle schoolers

This is a good age to get your children involved with saving up for something special. “You can offering to match their savings if they want something a little more expensive,” suggests Cruze. For example if a game costs $40, have them save $20 and then offer the rest as part of a reward for their hard work. “The older they are and the more chores they do, the more you can pay them.

And don’t forget to emphasize the concept of saving for the future. Teach them to save $0.25 of every dollar they earn or receive, advises Cruze. You can even turn this into a financial lesson. “Talk about how compound interest works in an investment account.” (Save that quarter a day from age 10 to age 65, and you’ll have $50k)! And middle schoolers should learn that a credit card is a loan that you have to pay off, not magic, invisible money.

High schoolers

Starting high school is a big deal—and it’s also the ideal time to sit your high schooler down and discuss the family’s financial plan for college. “This stage is going to be all about stressing why going to college is an important financial choice,” says Kobliner. Research shows you’ll earn $1 million more over your lifetime if you finish college that you will if you don’t, she adds.

As a parent, you should have a pretty good gauge of where you’re at financially by the time your child is a freshman, as well as where you’ll be over the next four years, says Cruze. “Let them know if you’re able to help them out and if you started a college fund. Be honest with your kids about how much, if at all, you can help with college. Tell them that it’s their job to get good grades and find scholarships. Let them know if their expensive, out-of-stage school or private ‘dream college’ may not be a reality. Help them make a college choice that’s smart for the family and smart for their future,” she adds. This will help them make better decisions to emotionally and financially prepare for their futures.

Don’t be too quick to cosign onto a credit card, either. “I’m not a fan of kids getting credit or debit until college,” explains Kobliner. “The middle school and high school years should be about learning to make smart choices with money—and the best way to do that is by using cash.”  

Should You Give An Allowance?

When it’s safe for them to handle it, allow preschoolers to use coins or paper money to play ‘store’ or ‘bank’ at home. You can also ask your child to help you pick out items at the real grocery store, too.

Even kids as young as age three might be ready for an allowance to help gain an understanding of the value of money. That amount can grow as they do (experts generally recommend a dollar per age). But try not to link an allowance to chores. “Chores should be tasks that kids do because they are motivated to help the family, not because their allowance depends on it. Because what happens when they decide it’s not worth that dollar to do it?” says Kobliner.

If you want to pay extra for tasks around the house, consider doing so for ‘special’ jobs like cleaning out the garage, or sorting family photos. That said, she adds, “there’s really no right or wrong way to do an allowance. If you find a system that works for your family, keep doing it.”

When Hard Times Hit

Hiding financial troubles from kids—like the fact that you’ve lost your job—generally isn’t a good idea.  “You should be truthful but age appropriate about money troubles when talking to your kids. Even if you have to cut back on spending, emphasize that you will get through this together as a family, and avoid language that is going to cause them worry or stress,” advises Kobliner. “‘Dad lost his job and we’re afraid of losing the house!’ is not appropriate.”

If your budget is tight, tell your younger children that you’re going to be cooking at home as a family more, rather than going out to eat. You can show your children how you browse for online coupons and deals when buying something online to save money here and there which helps the family out. If your finances mean you have to cut out things like the blowout family vacation you were planning, give your children a head’s up about it in advance, and let them know that you’ll still be doing fun, free activities around town that they’ll enjoy. You can share more information about your financial situation with older children when it’s appropriate—especially when you’re talking about planning for college, Kobliner adds.  

4 Money Mistakes Parents Should Stop Making

You’re probably guilty of a few of these bad money habits, but here’s why you should try a new approach.

  1. Fighting with your partner about money in front of the kids.

“This can have a real and lasting impact,” says Kobliner. A study of college kids found that those who had seen their parents argue about money were more likely to misuse credit cards. “Whatever your issues, keep them behind closed doors and present a united front to the kids.”  

  1. Cosigning on a credit card.

“Do not cosign a credit card for your high schooler or college student before she can legally get one on her own,” advises Kobliner. You kid should only sign up for a credit card if and when she has enough money to pay it off herself. “I’ve heard too many horror stories about parents who got their credit tanked when kids racked up purchases the family couldn’t pay off.”

  1. Hiding your credit card mistakes

As your kids get older, tell them about the mistakes you’ve made with money! “Humanize the topic,” suggests Cruze. “You might share, ‘We took out a credit card in college and racked up all of these bills and I regret it to this day. So don’t sign up for credit cards. Save up and pay for things you want.’”

  1. Becoming a human ATMs.

Plenty of kids tell their parents, “I need $10, I need $15,” and all too often, the parent’s reaction is, “Sure, here you go,” says Cruze. “You’re going to give your kids money, but they should know that eventually they’ll need to work for it. Teach them that you have to go to work and make money to survive today. Understanding that money comes from work—and not just from you—is a huge foundation point for them.”

Read the full magazine PDF as it appeared in The Science of Raising Kids, published by Centennial Health Publishing Spring 2018.

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