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Parents may be wondering how to teach their children what they need to know about money. On one hand, we don’t want kids to be completely naive, fall for scams and credit card company (or buy now, pay later) antics. On the other hand, no one wants to burden children with adult problems or become money-obsessed.
And we certainly don’t need to grow spoiled, entitled children that think money “Grows on trees”
It’s important as parents to teach kids to earn, spend and save money. Children have learned most of their financial habits by the age of 7. This is not a discussion you should put off until they are “old enough”, but like learning to cook or clean the house, something they should gradually learn in age-appropriate ways as they grow.
How do I Prepare My Children for Financial Success? Age Under 4
At this young age, kids are in danger of swallowing coins (which can get stuck) so playing with money is probably not a good idea.
These young children can, however, learn a lot through observation. It’s how they are learning everything else at this stage, and you will find them mimicking your behaviours in their play. It’s a cute (admittedly exhausting) stage.
Even at this early age, they are observing you grocery shopping and will enjoy swiping your card at the checkout. Using tap and go and ATMs are great opportunities to explain what is going on. If you look at the situation through the eyes of a toddler, it would appear as if the groceries are free, and the ATM is a magic machine that spits out endless money.
It is important to fill the gaps! That when you use these machines, the money you have earned for work is depleted.
Kids at this early age are cute and demanding. They are very easy to spoil. Remember that you are forming their expectations for the rest of childhood. Do not give into toddler tantrums and buy toys and sweets impulsively.
I always think this quote sums up parenting, although it wasn’t written about kids! It’s so applicable to many areas of life. Doing the hard thing initially often makes your life easier in the long run.
“Hard choices, Easy life.
Easy Choices, Hard life”Jerzy Gregorek
I remember carrying my toddler, screaming Kmart down over a $3 ball! It was incredibly embarrassing, but I don’t regret it.
The same toddler once pointed, asking for sweets hung just at his height at the check-out. The shop assistant laughed at my response of incredulity,
“Don’t be ridiculous. We don’t just buy sweets from the shop”
My young children soon understood that the toys at the shop were for birthday presents and sweets were special treats that mum and dad appeared with occasionally.
You may think I am a bit harsh. I’ve seen the way spoiled doctors kids turn out!
Kids this age are obviously impulsive. They see something, they want it. If you teach them to give in to these impulses and purchase nonsense to keep them happy/quiet it may become an expectation, then a habit.
If there is some toy they are really and persistently interested in, now you have the perfect opportunity to teach them about delayed gratification by saving up.
How do I Prepare My Children for Financial Success?Ages 4-6
This may be around the age you want to start giving pocket money or chores.
There are two ways to approach this. Some feel kids should receive pocket money regardless of chores so that they can learn to spend and save regularly.
Others feel this may lead to entitlement (being given money for nothing). They believe money should only be paid for chores.
Go with whichever feels right for you. Kids this age don’t need a lot of money. You don’t want to give them so much money they feel it’s never-ending. You want to give them just enough to buy little treats on occasion, but need to extra or save up for a special toy.
With our two boys, we are doing a little of each. They receive a cheapskate “allowance” each month into their savings account. Their account is actually an excel document on my laptop. The Bank of Mum & Dad pays an impressive 12% PA interest (paid monthly) to encourage saving and teach the concept of compound interest.
When shopping, kids can understand a little more. Vocalise what you are doing, such as choosing a packet of rice. How do you choose which one? Introduce the concept of value for money and budgeting.
Teaching money management skills is how to set up your kids for financial success as adults.
-Teach Kids to Pay for Financial Obligations First
Kids can understand the concept of “Needs and Wants”. There is are free financial literacy education resources available at Choose FI. My boys really enjoyed the needs vs wants game during the lockdown.
At this stage, you can reassure them that all their “needs” will be covered by their parents. But their wants are for them to save and prioritize. And of course, they can always ask for that special something for their birthday or Christmas.
-Open a Bank Account
You can choose to open a real account, or as we have, make a Bank of Mum and Dad account with an excel document. This important step can help kids form good money habits from an early age.
The boys can withdraw money from their “accounts” when they like (but obviously forfeit interest). This is also a lot easier than being organised enough to have pocket money cash available each week.
My 8 year old totally gets it. He is excited to see his savings grow, and I may live to regret the generous interest rate in 10 years time! The 6-year-old is still impulsive with money, spending it on plastic rubbish he is momentarily obsessed with.
Once some savings are collected, the idea of emergency funds can be introduced.
Our boys are expected to do regular unpaid chores, although I probably should up the ante a bit. They currently feed the goldfish, bring their plates to the dishwasher after each meal and put their own clothes in the wash basket (most of the time).
Both boys can earn extra money when they want to save for something. They get to clean inside the house, pack the fridge with our coca-cola (bad habit I know) or wash the car (badly!)
They could earn their own money from about the age of 2 (long before the allowance started). Despite not really understanding what it was all about, they were really interested in earning those coins. We just had to keep them in a money box out of reach when not closely supervised.
-Opportunities for Spending
I would take them to our local pool regularly between swimming lessons to practice and have fun. They have a kiosk that sells penny sweets and ice poles. The boys always took their wallets with enough money to buy a treat. I would help them work out the money and get them to speak to the kiosk attendant. They still want to go to this pool, years later, because of the sweets!
Kids are developmentally ego-centric between the ages of 2 and 7. Towards the latter end of this age range, a child will start to be able to understand empathy and other people’s opinions. It is a perfect time to introduce the concept of charity. Involve your child in your decision of which charity to support. Your child may like a jar in which they can collect their own money for charitable giving.
How do I Prepare My Children for Financial Success?Ages 7-10
These guys are still watching and learning behaviour from parents. You can explain more complicated concepts such as shopping based on the price per unit, but how sometimes it’s worth paying extra for quality.
Now is a great age to get them involved in the family finances in a positive way. When you have a special holiday planned, it’s nice to work towards it and build excitement.
Perhaps you discuss how you will fund the holiday. Will you take on extra work? How can everyone else in the family do their bit to contribute? Perhaps by covering some of your chores whilst you are doing the extra work? They may like to save up some spending money of their own to take with them. Help them set a goal and plan to reach it.
-Being Open About Money vs Burdening kids
Obviously, kids should be sheltered from any financial stress at this age. Bringing up the fees for the school you chose to send them to as a guilt trip is not healthy or helpful.
Try and avoid making saving money a negative. When growing up, our family would intermittently go on what my parents called an “Economy drive”. This meant no takeaway meals or other discretionary savings as mum and dad had to tighten their belts for a while. It may have been financially responsible to adjust their spending to ensure they could make the mortgage repayment that month, but it perhaps could have been framed more positively.
-Discussing Bills or Financial Decisions
Sharing some family money decisions can be a wonderful experience. We recently upgraded our solar panels, and the 8-year-old will enjoy looking at the electricity bills before and after. Of course, we also had to find out how solar panels work (ask my 8-year-old, I’ve forgotten!)
“Guess the price” is a game suggested by Choose FI. Kids have no idea about money initially. $100 seems so huge, they think it’s enough to buy a home. I haven’t tried this idea out yet but may play it with my older child to start developing some rough idea of how much things cost.
Board games such as Monopoly, Game of Life and Cashflow for kids can be enjoyable prompts for kids to learn the difference between assets and liabilities.
How do I Prepare My Children for Financial Success?Age 11-14
-Getting Involved in Family Finances
Kids this age can be quite involved in financial decision making for the family. In fact, there is even a TV series where the teen gets to decide how to handle the family budget for the month! It will take brave parents to put their child in charge of all their finances for the month! But watching an episode with your teen or pre-teen could spark great money conversations.
-Meal Planning & Grocery Shopping
Your child needs to learn to cook, and this can be combined nicely with a financial lesson. Your child should understand how to cook basic foods and prepare a meal for the family before complicating it further. But once they are ready, you could set them a budget for the family meal, get them to plan, shop and cook it.
-Shopping Around and Managing Bills
This may be a good age bracket to involve them when the dreaded car or house insurance renewal comes up. You know you need to shop around to avoid the lazy tax. I know you dread it because it’s a PITA. Consider showing your child bills and discussing if there are ways to reduce them, how it’s best to shop around to get the best price.
At 14 or 15, you may even be able to offload the task of getting a better car insurance quote to them. I know it’s not the sort of thing you had on your bucket list at this age, but you could offer them half the savings as a reward for a job well done.
With shopping, these age kids will probably be asking for products that their friends have. Again, these are opportunities to learn. Perhaps they want a pair of brand name running shoes. They should understand this is a want, not a need. Perhaps you will cover the price of a non-brand name pair, and get them to save the extra. You will find they will prioritize spending far more when it is their money, not yours.
-Chores & Employment
Kids this age should be doing their part around the house, and it should generally not be paid. Perhaps you can keep a few jobs available for payment such as cleaning your car.
But somewhere in this age range, your child may want to find some sort of external way to boost their financial capabilities. It is important to limit pocket money to allow this motivation to occur.
A warning to those that think their kids should focus on their studies and not be involved in work. Although the intention is so honourable, it can backfire. Young adults need to learn the skills important to becoming successful in the workplace. They don’t need mollycoddling (and that’s coming from a self-confessed helicopter parent).
Empower them to cope with competing demands. Grades are only one aspect of their growth into adults.
Before they are old enough to get a regular job, there might be options for them to help out neighbours you know and trust. Teens can wash cars, walk dogs, mow lawns and babysit. Plus probably loads more!
Once they are looking for their first jobs there is a load of opportunities for teachable moments. Helping them look for a job, present themselves and perform well. Make sure they are not being taken advantage of. Help them look at their payslip and check this. Teach them to pay taxes efficiently.
Your kid definitely needs a real bank account now, and you can help them look for the best available. You can help them work out a money management system to capture some savings.
Imagine if you had been set up with a decent super fund from the start of your adult working life. If you had known to roll over accounts and made sure the fees were reasonable, insurance and asset allocation appropriate. Help your child take advantage of compound investing for the next 40+ years by helping them understand superannuation.
Perhaps this will be superannuation.
Those that want to give kids a leg up with tertiary education costs may be investing for this anyway. Consider involving your child in this. What seems like a huge amount of money to a child may demotivate them to work hard and achieve academically. But I am considering putting $5000-$10000 in a Pearler* brokerage account in trust for each child for them to observe compounding over the decade before they leave home.
Imagine understanding the basics of the stock market, and having developed some volatility tolerance before you even left home!
Some invest money for children’s tertiary education and then offer them the choice of paying fees and living expenses with the money or letting the money continue to compound whilst living off student loans. This is pretty high-level financial literacy for a kid aged 18-20!
Tread carefully with the handouts though. Economic outpatient care appears to be detrimental to a child’s financial success. If possible maintain control over the majority of your funds so you can make a judgement call on whether they will act financially responsible with a lump sum closer to the time.
How much did you understand about money by the time you left home? Do you wish you were a bit savvier as a young adult? How do you plan to teach your own kids about finances? Comment below to join the conversation.
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Aussie Doc Freedom is not a financial adviser and does not offer any advice. Information on this website is purely a description of my experiences and learning. Please check with your independent financial adviser or accountant before making any changes.