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Fiscal responsibility is a vital life skill that far too many children and teens aren’t developing. Most schools simply don’t have room in their curriculum, and parents either find the discussion of money to be taboo, or don’t think children need to know anything about it. However, proper financial skills are the bedrock for independence and success in adulthood, which means it’s your job to equip your children with the fundamental knowledge they need to thrive.
But, how do you go about teaching children about a concept as substantial and unwieldy as economics? What is age appropriate and what isn’t? Where on earth do you even begin? Well, like most life skills, you need a basic foundation and to get started as early as possible.
Allowance
Before you can teach your children about money, they must have an income of their own. That’s where an allowance comes in. By requiring children to contribute to household chores in order to earn money, an allowance illustrates the direct connection between work and reward.
To teach money management, give money weekly to the youngest children, bi-monthly for preteens, and monthly for teenagers. Progressively spreading out the time between “paydays” helps children understand the need to regulate their spending so as not to run out of money before they get paid again.
If you find your children have spent all of their money right away, refuse to give them any more before their next allowance is due. Part of learning about financial responsibility is dealing with the negative consequences that come from making poor choices. Take this opportunity to talk about what happened, and how they can make smarter decisions next time.
Now that we have our foundation, let’s look at age appropriate ways to teach children about economics and fiscal responsibility.
Ages 3-5
I know, I know, three sounds so young! However, children start to grasp math and money concepts from a very early age, and you’d be surprised at just how much they understand. The best place to start is by explaining that money is a finite resource; that parents have to work to make money, and that the bank is where they keep their money safe.
Next, teach the different denominations of money (i.e. what each coin and bill is worth.) as well as the basic tools of exchange and value. You can do this by playing “store” with your little one. Set up a little store somewhere in your home and stock it with toys or boxed and canned groceries from your cupboards. Set prices for each item. Then, give your child a set amount of play money to make purchases. Not only will they have tons of fun, they’ll also learn about what money can buy, basic budgeting, and how we exchange money for goods.
The moment you start giving your child an allowance, they need to get into the habit of saving a portion of the money they earn. Purchase a piggy bank with separate money slots for spending and saving, or make your own by labeling or decorating jars. When your children receive money, teach them how to divide money into each category. Let them choose a savings goal (most likely a toy), and then periodically count the money in their savings together. Make a chart to show them how close they’re getting to their goal and praise their progress. This will teach them the joy of saving money and help to curb the need for instant gratification.
Finally, this is the age to start defining the difference between needs and wants. Teach them that a “need” is something they require for survival (healthy food, a home, etc) and that a “want” is just something that would be nice to have. You can turn this into a game by listing different items and separating them into each category together. If children don’t learn the difference between needs and wants early, they may find themselves in serious debt as adults.
Ages 6-9
Now is the time to really drive home the concept, “If you don’t have the money, you can’t spend it.” This is best illustrated by involving your children in all aspects of the household shopping. Before you leave the house, create a budget together. Plan what you’re going to buy and determine how much money you have to spend. Then compare prices and search for coupons together. This teaches children that we must plan purchases before we make them, and that sometimes we have to make adjustments (going to different stores, using coupons, buying store brands) in order to fit things into out budget.
Of course, it’s not often a parent can get through a shopping trip without their child asking for something that’s not on the list. When your children ask for something that you don’t wish to buy, explain that buying that item is not in the budget. Take a moment to talk with your child about why the purchase may or may not be a good idea, how they can use their own spending money to purchase it, or how long it might take to earn and save that amount. (Note: It’s okay to say yes to an impulse purchase every once in a while.)
Knowing where their money is going is another important step forward in your child’s money management skills. Help your child set up a notebook, spreadsheet, or app to keep track of their money. Keep a file folder or envelope where they can store receipts and statements to help with their tracking efforts.
This is also the time to start talking about (and making) charitable donations. Help them research organizations they might like to support and then set up a new bank/jar for part of their allowance to serve as donations to those causes.
Ages 10-14
Once kids get to their tween and teen years, start the discussion on how to make big-ticket purchases. Demonstrate the research involved (reading articles, combing through reviews, and comparing prices) as well as how to find applicable coupons, negotiate with salespeople, and ask about price matching services.
Although it may seem early, this is also the time to have your child begin saving for college. Even if they’re only making small contributions, they’ll be able to save up several thousand dollars by the time college rolls around. Saving for their own education also helps the child to appreciate the opportunity even more.
It’s important to note that financial aid for college (FAFSA) is determined based on the income and assets from the year prior to applying for aid. Therefore, a child with a considerable amount of savings in their name could end up losing out on quite a bit of free money for college. This is why it’s best to put both your and your child’s contributions into a 529 plan or trust account.
Ages 15+
Here’s where everything you’ve taught your child about money comes together and they get their first real taste of financial independence. This will be a time when they’ll be making some big fiscal mistakes, so they’ll still need your guidance and support. However, it’s also important to let them stand on their own two feet and make their own decisions.
Getting A Job
When children reach the age of 15 or 16, their income needs to start coming from a source other than their parents — that is, they need to get a job. A job teaches life skills such as how to deal with difficult personalities, manage time, and network. With a paycheck comes the awareness and understanding of standard deductions such as federal and state income taxes, social security, medicare, and health insurance premiums. Furthermore, a job has the added benefit of teaching them how to set up a checking account, use a debit card, manage their balance, and file taxes.
Preparing For College
There’s no doubt about it, college is expensive. It’s a regular money pit. The cost of tuition at public universities has risen by over 296 percent since 1995. Though student loans are always available (and teaching kids about loans and interest rates is important), no one wants their child to have to start adult life in a massive amount of debt.
Besides the savings both you and your child have put aside for education, scholarships and grants are two of the best ways to pay for college. The money given by companies and organizations through scholarships and grants is earned through time — whether it be spent writing essays, coming up with innovative product ideas, or creating art. Your teen will need to start searching and applying for scholarships and grants up to three years before starting college classes. Although this may be frustrating, it is yet another reminder that money is never free — it is earned by some means.
Anticipating Life In The “Real World”
Finally, as your teens blossom into young adulthood, they need to learn how adult finances actually work. Introduce them to the ins and outs of your entire family budget. They need to know about each and every bill you pay as well as where the “leftover” money goes (savings, groceries, entertainment, and so on). Demonstrate the importance of spending less than you earn. Then, help them create their own budget. Give them the responsibility of paying certain bills, such as their phone bill, car insurance, or the internet.
The day your teenager turns 18, it’s time for them to open and start contributing to an IRA. Again, although it may seem early, saving for retirement at a young age can accumulate a lot of savings as the years go by. Compound interest is a beautiful thing.
Conclusion
Personal financial responsibility is one of the most important lessons you can teach your children as they grow. By doing so, you help protect them from making the kind of major financial mistakes that only lead to frustration and distress. As a parent, preparing your children for a long, successful life should be your ultimate goal. Do everything you can to give them the gift of financial independence — you won’t regret it.
