Money Management: When And How To Teach Children About Money
Money management is an essential skill for life. As important as helping your child develop reading, writing and mathematical skills, instilling children with financial fundamentals from an early age enables them to live a financially sustainable and responsible life.
The following article discusses when and how to teach children about money at every stage of their development.
Early to Middle Childhood: Identifying Coins and Imaginary Store
It is never too early to start—at age 3, you can begin by explaining that money is earned by working, the bank is a place that keeps money safe, and that money is used to buy things.
It is easy to teach children about money when you turn learning into games. In the early to middle childhood years, your child is ready to learn coin names and identify coins. Once your child is comfortable doing so, you can play “imaginary store.” The idea is to understand the basics of commerce—exchanging money for goods.
Keep in mind that it is easier for children to understand abstract concepts with tangible methods—let your child see you make real life purchases with cash. When using a debit or a credit card, make sure to explain that you are still using your money by showing receipts.
Early to Late Tweens: Managing a Small Allowance
Money management can best be learned by allowing children to manage their own money, beginning with a small allowance and a place to safely place the money. Children in their early to late tweens begin to understand the value of money and distinguish the difference between a need and a want. They are ready to manage a small allowance.
While chore-based and repeated allowance are both popular methods of providing an allowance, a suggestion is a hybrid approach—give your child a set allowance each week, and if they would like additional amounts, they can propose ways to help out in return for payment. This gives children an idea of the real world, while making it clear that as a contributing member of the family, they are not being rewarded for doing something they should be doing already, such as cleaning up after themselves.
It is also important to teach children that money doesn’t have to be spent immediately. Help your child open a savings account, encourage them to make regular deposits and save for a short-term goal, such as an item that they really want, which teaches them discipline and delayed gratification.
Teens: Spending, Saving, and Investing
In your child’s early teen years, you can begin teaching how they can build wealth by investing their money. If you think age 12 is too early to begin investing, Warren Buffet purchased his first investment at age 11.
Custodial investment accounts can be opened at many financial institutions for your child and the easiest asset class for children to begin with is stocks due to the child’s familiarity with products and services from companies they already know. Stock investments could even become a family activity in which the family can discuss what stocks they like, and how and why the stock values of everyone’s choices fluctuate over time.
While saving for short-term goals is exciting and good to start at a younger age group, parents of this age group need to introduce the importance of setting long-term goals such as saving for education, car, house, or even retirement, which involves thoughtful allocation between spending, saving, and investing.
Lead By Example
Lastly, there is no better way to teach than to lead by example. Bring your children into family budget discussions and show them how you responsibly handle the family’s money as a parent. Demonstrate how you use family goals to guide money management—spending, saving, and investing—whenever possible.
This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.