Teaching Kids About Money: 5 Concepts to Know

When it comes to kids, money habits are ingrained by the age of seven?¹ In fact, you can start introducing money concepts to kids as young as three years old. Remember, though, that even as you introduce money topics early, lessons need to be age appropriate.  And, parents with older kids, don’t despair – habits can be changed. Our five teaching concepts will help you guide your child’s money education, whatever their age.

1. DELAYING GRATIFICATION IS CRUCIAL

Learning to delay a reward now for something better later is a crucial skill. Study after study demonstrates that people who cultivate this skill have higher levels of life satisfaction and are more likely to achieve their long-term goals.²

How does this relate to money? Kids want to buy the first thing they see – this often applies to teenagers as well! But that’s not the best way to save for a bigger purchase or achieve long term financial goals. How can you help your child see that?

• Explain the difference between a need and a want. As humans, we need food. As consumers, we want a candy bar. There’s a major difference! Similarly, while a child may want a fancy new toy, she should also understand that she needs a warm coat for the winter. One is a nice-to-have, the other is an imperative.  
• An allowance is a good thing. Kids should have a certain (modest) amount of money to use as they wish. This teaches them money responsibility and real-life lessons – far more than their parents lecturing them on the topic. However, for an allowance to be a good teaching tool, parents can’t interfere when their child runs out of money. That’s part of the lesson – when you spend it, you lose it!
• Implement a cooling off period. If you see your child repeatedly make the same mistake of spending all their money on some shiny thing they won’t really enjoy, it might make sense to implement a cooling off period. In other words, if the child wants to make a purchase over, say, $20, they need to wait 24 hours to think about it before they buy. This forces them to consider whether they really need the item, or if they are just caught up in their emotions.

2. YOUR BEHAVIOR MATTERS

Whether you like it or not, your kids pick up on what you do (and don’t do) with your money. That’s why being open and honest about money at an early age is important. Some key points:  

• Talk through major purchase decisions. For example, when you arrive home with a new car, explain why. Maybe your old car was breaking down too frequently, costing you money and causing headaches. And maybe you chose to upgrade to a fancier car because you felt like the extra money was worth it – you have a long commute, so you would really enjoy the amenities. In cases like these, broad descriptions are fine – no need to get into specific monthly payment amounts, or financing terms. You just want your kids to understand that the car didn’t appear out of nowhere.
• Be open about your financial challenges. For example, maybe you have a propensity for credit card debt. You are better off acknowledging this issue and explaining how you’re working to improve. Your kids are less likely to repeat your mistakes if they see you making genuine efforts to change. (And, again, no reason to get into interest rates and specific amounts – just general concepts about what you are trying to change and why.)
• Avoid spats about money in front of your kids. When talking about money with your kids, parents should present a united front. Kids who see their parents frequently arguing about money matters will associate money with stress, unpleasant feelings, and mistakes. This is not what you want – deep financial disagreements should be aired in private between parents only.

3. FAMILY FINANCES ARE EVERYONE'S CONCERN 

As a parent, you are the final decision maker. But when kids are invested in the family’s finances, they are more likely to see how spending money connects to their day-to-day options. There are a few easy ways to incorporate your kids into the discussions.

• Talk about financial tradeoffs. For example, maybe you buy generic brand cereals for the family’s daily breakfast, so you can turn that savings into a weekly family dinner out on Friday nights. Let your kids provide input on tradeoff decisions like these.
• Everyone has a say about vacation. One great way to incorporate kids into the conversation is during vacation planning. There are usually many great activities, at many different price points. How can you work together to make sure everyone gets to choose some activities they will enjoy, while staying within budget?

4. BUDGETING: MAKE IT REAL 

Credit cards and online payments mean money doesn’t always feel real, particularly if you have young kids. In fact, kids don’t really start to develop their abstract thinking skills until about the age of twelve. We have three ways to make finances come to life.

• A little make-believe. For very young kids, it makes sense to play “store.” Take turns manning the cash register and being a shopper and spending finite amounts of play money for a series of purchases. Make change and show your kids that they can only spend as much as they have, so they need to choose wisely. You may also want to spend cash in front of young kids when you’re actually shopping, so they see their game in action.
• Open up a savings account for child. Make a big deal about going to the bank, explain to kids that this is where they can store their money. Most banks have fee-free options for children-including Old National Bank!
• Give your kids a clothing stipend. With older kids, give them a clothing stipend. By the time they are young teenagers, they probably don’t want you choosing their clothes anyway. So give them a set budget (that you’d already use anyway) to buy the clothes they need. They’ll have to balance purchasing what’s trendy (and expensive) with what’s practical (and likely cheaper), while making sure they have enough options to appropriately clothe themselves at school.

5. CONNECT MONEY TO WORK 

Make sure your kids understand that money is limited – and that if you want more of it you need to work for it. We have a few tips on how to do it.

• Explain that you earn money. You go to work in part so that the family has money. That may seem obvious to you, but to a six year old, it’s not. Explain this to them. Also, make sure you make a connection between what you can spend and how much you earn.
• Make sure an allowance is NOT tied to family chores. This is an important clarification: you want your kids to feel like part of the family team. Chores should be an expectation for each member of the family … because they’re a family member. Not because they’re paid for them. Otherwise, kids won’t be willing to help you unless they get paid, and that’s not an attitude you want to cultivate. (While this may seem contrary to this topic, you want to connect extra money to work, not all work to money.)
• Do give kids an opportunity to earn extra money. For younger kids, this may mean letting them keep a portion of the proceeds from a garage sale they helped with. For middle schoolers, encourage them to babysit, mow neighbors’ lawns, or other nearby opportunities. For those old enough, this could also mean summer jobs or part-time work after school.
• Help your teenager open a checking account. Once teenagers are making extra money, help them put it in an account where they can spend or save it as they see fit. Most banks have options. For example, Old National Bank, has a Student Checking account for students age 13 to 25, that has no monthly service fee.

While this may seem like a small thing to teach healthy money habits, it’s actually one of the best gifts you can give your children. It sets them up for a lifetime of financial success and confidence. And that is something every parent wants for their child.  

1. “Developing independent learning in the early years,” International Journal of Primary, Elementary and Early Years Education, by Whitebread, David, et al., Volume 33, 2005, Issue 1.

2. “The Benefits of Delaying Gratification,” Psychology Today, Ilene Strauss Cohen, Posted Dec 26, 2017. Available: https://www.psychologytoday.com/us/blog/your-emotional-meter/201712/the-benefits-delaying-gratification