Teaching Children about Finances

I have received a lot of interest from a post I put on Quora about teaching your kids about finances, so I thought I would share and expand on that information here.

The original question was asking how to teach your children about finances.  I believe the best lessons in life are learned by living it, so here are my thoughts.

Young children 2-5

Periodically give a 2-5 year old a dollar to spend when you are at the store together.  Let them pick a prize for themselves and allow the option to not spend it and save the money if they wish.  I guarantee you will have a teaching moment when your child want’s something that cost more than a dollar.  Simply say, well save your dollar this trip and next time we are here maybe I can give you another dollar (or two or three whatever it takes) to buy that.  Deferred gratification is one of the greatest skills you need to learn for financial success.

Kindergarten and Grade School

Give children an allowance beginning in kindergarten. Start at $1 per week in kindergarten and increase it $1 each year until they reach 6th grade.  Don’t tie it to chores, just give them an allowance and create opportunities for them to plan what they want to spend their money on and DON’T, ABSOLUTELY DO NOT bail them out when they squander all their money or don’t have enough to pay the sales tax.  On the flip side, don’t berate them over squandering the money either.  Learn to say things like “Wow that sucks, I am really sorry you don’t have the money to buy that, so how about the weather?”  The bottom line is that them not having money is not your problem, it’s their problem.  They will definitely want to make it your problem, but it’s not.  You may have to bite your tongue, because our natural instinct is to point out to our kids where they screw up, but you have to truly not care about their money problems.  The natural consequences in this system will take care of the teaching and you don’t have to be the bad guy.

I mentioned not tying allowances to chores and here is why. Doing chores around the house is part of being in a family and you don’t get paid for that.  At least I have never been paid to do the laundry or clean the dishes at my house, maybe things are different at your house.  It is however, acceptable to give children the opportunity to earn additional money by doing things above and beyond the norm.  Establish the value of the job and what the standards are before the work starts.  No children are not small adults so have reasonable expectations, but do have expectations.

Pre-teen/Teen Middle School and High School

By sixth grade, I like to change the allowance scheme and give them lunch money for school and then allow the option of fixing themselves a lunch to take (you have to provide the items to fix their own lunch, but don’t actually make the sandwich) The kid chooses to keep the money for other things or spend the money on lunch, just be sure you don’t fix the lunch or bail them out when they run out of money.  Lunch money works well, because it is actually a pretty good amount in a typical school, but it is money you were going to spend anyway, so it rarely will break the family budget.  The incremental cost of buying a loaf of bread and lunch meat is usually negligible and allows the opportunity for your pre-teen/teen to accompany and assist you in grocery purchasing.  That is if they want input into the type of lunch items you buy.

The key to your child learning finances is it has to be their responsibility and if they blow all their lunch money on Monday, that’s the kid’s problem you have to let them deal with it. Nobody is going to starve if they miss one lunch or have to fix themselves PBJ’s for the remainder of the week.

Probably the hardest part is to not judge and allow your child to fail with his or her finances.  Their natural failures are actually the best teachers; whereas,  constant financial success rarely teaches a child anything.  Except maybe to expect someone to bail them out when they have a problem.  Remember your child’s financial failures at 5 will help insure they don’t make those same mistakes at 35.