Never Too Soon to Start Teaching Your Kids about Money, Part 2: The Older Years

As we discussed in our last post, many parents worry whether their children will establish good habits regarding money and enjoy financial security as adults, but initiating discussions and creating learning opportunities throughout childhood can significantly enhance kids’ prospects for financial success.  In Part 1, we explained how elementary-age kids can learn about earning money, budgeting, and saving toward goals through chores, allowances, and inclusion in household spending decisions.  In this post, we discuss a strategy for elaborating on those early lessons as kids grow and preparing them for making good financial decisions once they enter the “real world” after high school or college.

Middle School / High School Age:

Increase Opportunities for Income and Responsibility for Expenses.  To create opportunities for your pre-teen and teenage children to learn more about budgeting and saving toward goals, you can help them to find ways of obtaining additional income and increase the types of expenses that they are responsible to cover on their own.

• Income.  You can help them generate additional income by increasing allowances (and related chores), giving them occasional opportunities to earn more money through bigger (perhaps seasonal) household chores, and/or facilitating or encouraging them to find work outside the home.  Since these chores or first jobs will likely entail monotonous tasks, strenuous physical labor, and/or dealing with difficult customers, try to regularly encourage your children and remind them of the benefits of their hard work.
• Expenses.  With additional income, your child can now afford to purchase items for which you may have paid in their younger years.  In addition to toys (which now may take the form of video games or other electronics) and treats, kids may now be expected to buy some of their own clothes, meals outside the house, entertainment, etc.  This will provide numerous opportunities for them to learn more about budgeting, goal setting, and the opportunity costs of their decisions.  Perhaps they want to save to buy a new iPod, but if they buy a snack every day after school instead, they will use up all of their allowance money and will not reach their goal.  Perhaps if they buy a new shirt at the mall, they won’t have money to go to the movies with their friends the following weekend.  Talk through these spending and saving decisions with your child as much as you are able, so that they recognize the trade-offs and repercussions of their choices.

Introduce Financial Concepts They Will Encounter as Young Adults.  While your kids are still living under your roof, try to help them understand basic financial concepts that they will encounter in the “real world,” including taxes, household expenses, banking, and, when appropriate, the use of credit.

• Taxes and Household Expenses.  As your child earns more income and pays for more expenses, discuss the different taxes that they are facing (e.g. sales tax, possibly income tax).  Educate them as to the magnitude of the various types of taxes and the services they receive as a result of paying them.  Especially once they start driving, you can also give them the task of running errands that will help them build familiarity with household expenses, e.g. picking up dry cleaning, buying a gallon of milk, etc.  Many teenagers know exactly how much the latest iPhone or stylish sneakers cost, but not how much basic groceries cost.  These experiences will prepare them for budgeting and assuming responsibility for their own household expenses down the line.  One father, described in a New York Times article, aimed to drive these points home using visuals.  He withdrew his entire monthly paycheck in $1 bills and spread it across the dining room table in front of his teenage kids.  He showed them exactly how much money went to pay the family’s taxes, charitable giving, mortgage payment, soccer, Boy scouts, hamburger night, and so on.  He felt that, once they were of a proper age to be discreet about family income and expenses, it would be an advantage as they approached adulthood to know how much it takes to care for a family and household—and exactly where all the money goes.
• Banking.  When your child’s income and potential for savings begins to increase, help them open a savings account at a local bank or online.  Discuss the concepts of interest and compounding, e.g. how their money will make money just by sitting in the bank (interest), and then they will start earning interest on the interest as well as the initial amount saved (compounding).
• Cash vs. Credit.  Encouraging and modeling the use of cash—not just credit or debit cards—for purchases can be helpful as kids grow to see where their (or the family’s) money is going and to feel the scale of their spending choices.  Even if you allow them use of your credit card for online purchases, have them pay you back in cash, so that they can truly see what it cost.  However, as kids approach college age, it may be a good time to help them apply for a credit card and to teach them about the use of credit.  Ensure that they understand the need to still live within their means and to pay off the credit card in full each month.  Explain how missteps with credit early in life could hurt them later on—how revolving credit card debt could result in paying significant interest and penalties as well as damaging their credit score, which could make home buying more expensive down the road.

Kids observe the significance of money in family life, so it is important that parents not shut down or dissuade questions about it, but rather foster age-appropriate conversations and experiences.  As parents, try to set a good example with respect to money management, but depending on your kids’ ages, admit to and explain mistakes that you’ve made with money as well.  Encourage openness, but make sure to still help your kids feel secure, especially during periods of financial uncertainty.  Hopefully, you can be open about needing to make tough choices without burdening them with the fear that they won’t be taken care of.  All of these lessons will help them establish a positive relationship with money and lay a foundation for adopting good financial habits as young adults.