It’s never too early to start teaching children how to manage money, especially since the window for establishing good habits doesn’t stay open forever. University of Cambridge research suggests spending and saving habits are formed in early childhood and set by age seven.
Do not underestimate a child’s ability to understand money. We make financial decisions every day for our family, and children will only benefit from being part of the conversation. Whether you offer your children a three-jar allowance (when kids receive a small sum of money they divvy up into save, spend, and give jars) or help them open their first bank account, there are many ways to include kids in the financial planning process. Here are some ideas for teaching children of every age – from your little one to your teen – about the importance of smart spending, saving, and investing.
Pre-K to Early Elementary School
You can start teaching children as early as age two about finances by simply explaining that everything we buy costs money, from essentials like the food we eat to exciting new toys they might want. Let them be part of the process. When you go to check out at the store, allow kids to insert the card or hand the money to the cashier and explain the transaction of purchasing while you do this. These little steps help young children connect the dots and establish an early understanding of spending.
Elementary to Middle School
At this age, you can give children some money (five to ten dollars) to manage while shopping. Explain to them that they can spend that money however they want while showing them tradeoffs – like how getting multiple inexpensive things means you cannot get one expensive item or vice versa. As kids get a little older, you can also try hands-on activities as teaching tools. For the aspiring entrepreneur, consider helping them start a lemonade stand, grass-cutting, or dog-walking business. Talk to your children about what to do with the profits from their small business.
High School and Beyond
When you are ready to move beyond the piggy bank, there are many options to consider when opening accounts for children. You can open a guardian account, where you remain the owner and your child makes the decisions. Another option is a custodial account, where the child owns the account and you control it until he or she reaches a certain age. If your child is earning income, you can open a Roth IRA or a 529 account in his or her name. Be sure to talk with your kids about the responsibility of managing an investment account, and give them some freedom to make decisions (or some mistakes) on their own.
Whatever your approach to teaching financial literacy at home, it is important to keep it fun and engaging. Managing your finances correctly is the pathway to future opportunities, such as buying a car, saving for college, or paying off student loans. It’s always important to balance conversations with appropriate precautions, but the goal is to get kids excited about the possibilities that come with sound financial habits.
