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Teaching Children About Money

How should children learn about money?  Schools do little (if anything) to teach about money, so this is left to the parents.  Some parents may wonder if they are appropriate teachers when they do not know that much about money themselves.  Relax, it is not as hard as you may think, if taken in steps.  Most people first teach children about savings and investing by using an allowance.  However, the first few steps in teaching your children do not even involve your children.   It starts with you and your intentions and beliefs.

  • Set goals on what you want to teach - These goals will impact how you raise and interact with your children (via your examples).   Remember this education will be last until they are at least 18 years old, if not a lifetime, so think long term instead of just the immediate future.  Some sample goals are:

    Teach my children the value of saving for an emergency fund and retirement

    Encourage my children to invest in themselves through a college (or other advanced) education

    Offer my children conscious choices about money, instead of having money drive their choices

  • Review what and how your parents taught you about money - The way your parents taught (or did not teach) you about money will naturally influence the way you teach your children.

    What good ideas did they use?

    What lessons did you have to learn on your own that you want to teach your children?

    Subconsciously, what lessons, or beliefs, did you learn? For example, did you learn that: 

    The rich get richer while the poor get poorer

    You need to work hard to have money

    There is never enough money to do what you really want

    It is important to keep up with the Jones

  • See how guilt influences you - Money and guilt go hand in hand with children.  With many households having either two working parents or a single parent household, you may feel guilt and sadness that you can not be there for your children during the day.  So, the easiest way to make up for the lack of time may be to buy them the coolest new toy.  Instead of giving them quality time, we shower our kids with gifts, vacations, or expensive trips to baseball games or amusement parks.  However, these lessons may be teaching our children that money can buy happiness. 
  • Make choices about an allowance - It may sound simple, but there are actually a lot of choices to make if you decide to give an allowance.   If you have your goals set then this should make your decisions easier.  In my mind, the learning aspect of an allowance is allowing your child to make choices and mistakes with his money before going off to college when he will be on his own.
When to start Some say that an allowance should start as early as age 3 to 5.  Others say children should better understand money before they start around ages 6 to 7.  Other families never give an allowance. An allowance is more about giving your children time to learn about money before they are on their own. Wait until your children have an interest in learning or when they are interested in spending your money.
How much to give Some say to start at a weekly allowance of the child's age (or 1/2 that amount).  It is also very dependent on the parent's income and what the child is expected to pay for.  In addition, if your child has a job, he is less dependent on an allowance. Do what you feel is right, not necessarily what the neighbors are doing.  You don't want to get trapped into "keeping up with the Jones."  The best process is to set an allowance with your child based on a mutually agreed upon budget of what your child is expected to pay for.
Money for grades or chores Most experts advise against this because being raised in a family should be about helping each other out.  However, a majority of parents (74% per Youth and Money Survey) tie allowance to chores and/or grades.      I believe doing a good job (getting good grades and helping with chores as a family team) should be done without expectation of instant rewards.  An allowance is about teaching money skills not as a reward system.  Also think about the time your child is a teen, when rewards will get a lot more expensive.
Should we force savings and charity Two key elements of prosperity is learning to save and give freely.  21% of parents force their children to give to charities or church while 56% require their children to save (per Youth and Money Survey). The goal of allowance is to give children choices.  Yet, the learning process needs to be controlled.  So you can give your child choices such as which charity they want to tithe to or how much to give and how much to save (5%, 10%, 20%).  In addition, you can give them a target saving or tithing amount that they can change for valid reasons. Your child may surprise you and save or tithe more when they think about where their money is going.
Decisions on spending How much control should your child have?  Can they blow their whole allowance on music and video games? The older your child gets the more choices they should have (to ease the transition to adulthood).  Yet, it is o.k. to give selective choices to younger children and to provide teens with target amounts to spend on clothing and school supplies.
Bailing children out of mistakes A parent's natural instinct is to protect our children from the day they are born.  This protection is at first for safety reasons.  Later, it can evolve into protecting them from mistakes that we have made. Unless there is severe physical, mental, or financial harm, I would let the child make the mistake and learn from its consequences.  You may offer choices and explain the impact of the choice they are about to make, yet delaying the learning can make the mistake even more painful later in life.  In addition, even if you are right, teens are not known for listening to parents (especially when force is used).  They will listen more when they learn the wisdom of your experience from making their own mistakes and learning that your words of wisdom were actually right.


  • Discuss your finances with your children - We all can learn by examples.  By explaining how you handle your money, you children will learn from your examples and mistakes.  I remember conversations around our dinner table while growing up about investing in the stock market.  So, when I graduated out of college, I made sure I invested my 401(k) at work in the stock market.
  • Addition by subtraction - It is sometimes what you do not give to your children that can be a valuable lesson.  By the time your children are in high school, you have probably increased your standard of living substantially from the time that you left your parents home.  So, you may be sharing your wealth with your kids by buying them a car, iPod, or other cool toys.  The question is when your children start off on their own, will they be able maintain this lifestyle?  Most can not but try to anyway, and get into credit card debt and avoid savings for a house and retirement because they are trying to live a lifestyle they became accustomed to but can not afford on their own.  So, even if you can afford to spoil your children, your children may be better off living more modestly in high school to ease the transition when they leave home to their first entry level position.

Most of your child's learning will be based on what he experiences.  It is not about teaching the fundamentals of investing that is important, but rather what he learns about dealing with money through an allowance and life experience.  So share your life experiences with money because it is just as valuable as your child learning it on his own.  However, be cautious on how your share your experiences with your children.  If it is in a way of complaining about how tight money is while not discussion solutions, your child may fall into a trap of believing money is a struggle and it is impossible to get ahead in this world.  So, discuss the options and solutions so that they can see how they can overcome their problems when they occur later in life.

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