Never Too Soon to Start Teaching Kids about Money, Part 1: The Younger Years

For those of us who are parents (or play a parental role as guardians, caretakers, or involved family members), we spend countless hours worrying about our children’s safety, wellbeing, and prospects for the future.  One particular area of concern, especially if you have struggled financially at some point, may be whether your children will establish good habits regarding money and be successful financially as adults.  Initiating discussions and creating learning opportunities throughout childhood can significantly enhance kids’ prospects for financial success as adults, so it may be helpful to consider ways to broach this sometimes-uncomfortable topic in age-appropriate ways, as we discuss below.

Pre-School / Elementary Age:

Even at a young age—while your child still cannot count to 10 without skipping that elusive number 7, or still prefers getting a shiny coin to the duller alternative of dollar bills—children can absorb financial concepts that will help them later in life.  These include the idea that one must work to earn money, that budgeting involves making choices, and that it can be rewarding to save toward a goal, even though it may require patience to do so.

“We work hard for the money.”  Regardless of how you and your spouse divide household responsibilities and work done outside the home, collectively you work hard for the money that pays for your family’s lifestyle.  While you don’t want to make your children feel guilty for using a share of the family’s resources, it is important they understand that the things you have (e.g. home, clothes, car, toys, vacations) are tied to work.  This can be accomplished by comments or conversations—e.g., encouraging gratitude for Daddy or Mommy’s job, which enabled the purchase of that new Lego set—as well as through participation in the work and resources of the household with chores and an allowance.  Whether an allowance should be directly tied to the completion of certain chores is a subject of debate among financial professionals, but they do agree on a number of issues.

• Responsibility for household chores helps build a sense of mastery, self-reliance, and empathy, and studies indicate that it is a predictor of academic, emotional, and professional success.
• Giving children a choice of chores, or at least choice in the order or timing and pace of chores, can be empowering.  Children be more motivated if they feel a sense of autonomy in their duties rather than just working for profit (i.e. the allowance).
• Chores should be focused on the good of the family / household (e.g. setting the table, emptying the dishwasher, helping with vacuuming, dusting, or laundry), not just focused on self-care (e.g. getting dressed and brushing your teeth), especially if they are tied to an allowance.  This gives children more of a sense of purpose in that they are doing something for others.  Self-care and basic, self-focused tasks (such as putting one’s own toys away) should be done simply because the children are members of the family, not for the sake of allowance.
• The magnitude of chores as well as the amount of allowances should increase as children get older, and the types of expenses that they are expected to cover with their own money should expand as well.  Whereas young children may be allowed to just use their savings for toys, older elementary school kids may be expected to use it if they want to buy an extra snack at school or buy clothes or school supplies beyond what they need.

The key takeaways are that, if used effectively, chores and an allowance will enable parents to instill in their children a work ethic and provide opportunities to teach money management.

“But I want it NOW.”  Whether kids acquire money by allowance, gifts from family or friends, doing specific chores for pay, or being allowed to sell toys or other seldom-used possessions at a yard sale or the like, parents can use these opportunities to teach their kids about saving, budgeting, and making financial choices.  One way to encourage saving is by helping your child set an achievable goal (e.g. buying a new doll) and track progress toward that goal.  Many experts suggest using visuals, such as saving money in a clear container or drawing a picture of their piggy bank and putting marks on it as they advance toward their goal.  As they work toward the goal, they learn about making choices and delayed gratification.  (If they buy a candy bar with this week’s allowance, it may be delicious, but it won’t help them move closer to buying the new doll.)  Try to curb impulse buying by not giving children loans against future allowances (either at home or on the spot at the store) or by paying for an item on their behalf and having them reimburse you.  Instead, help children to count their money as they save and also to pay for items using their own money handed to the cashier when they spend it.  Again, a major aim of this exercise is to teach delayed gratification, which can yield significant benefits as children grow.  According to Beth Kobliner, author of “Make Your Kid a Money Genius,” children who understand delayed gratification when they’re young actually fare better later in life—scoring 200 points on average higher on their SATs, enjoying better interpersonal relationships, and even registering lower body mass indexes.

These lessons can be reinforced by talking through basic household financial choices and giving children choices in family budgeting decisions.   For example, parents can allow children to make decisions at the grocery store between different snacks for their school lunches, helping them to understand that parents don’t budget enough money to buy all of the snacks that might look appealing.  Or, parents can give a child the option of deciding on family entertainment—e.g., whether to go out to dinner or to go on rides at the fall festival in town—to further appreciate that money management involves tradeoffs.  Many experts encourage parents to introduce the idea of sharing money as well—having a child set aside some of his or her savings to give away to a charity, church, or others in need.  This reinforces the idea of opportunity cost (spending money means choosing not to save or share it), teaches children to stay within their means (setting aside money to share means that they grow accustomed to not spending every penny they earn), and helps children to be grateful for family resources, understanding that there will always be others who are less fortunate.

Starting to teach children about money management when they’re young can yield significant benefits down the road, though it does require patience and perseverance on the part of parents.  Even Warren Buffet emphasized this point when he launched an educational program for young kids a few years ago to encourage financial literacy, called the Secret Millionaires Club.  In our next blog, we will discuss how these ideas can be expanded as children approach the middle school and high school years to better prepare them for adulthood.