Each week we ask a question to help you focus on an area of your finances that might need a closer look. This week: What’s the best way to teach kids about money?
One thing we definitely know about maximising your wealth: start as early as possible. Compounding is the key, so the sooner you get started, the more your money will grow.
Warren Buffet started investing at 11 and that turned out quite well for him. Imagine if our kids could do the same? Or even out-Buffet Buffet and start at 10, or nine, or five…
It starts with including kids in the conversation about money at home. It progresses to helping them earn pocket money. Then they get a part time job and they’re really off and running.
Along the way, it’s important to instil the fundamentals of investing and saving. It’s not rocket science, we know that. Rather, it’s a few truths about money that the earlier people learn, the more likely they are to be financially in control for life.
Fundamental truths to teach kids about money
1. You need to work hard to earn money
To kids, money is just coins and notes (or numbers on a screen these days!) that let you buy stuff. They don’t necessarily know where it comes from or why.
So the first thing to teach kids about money is teaching them that you have to earn it. Yep, the old ‘money doesn’t just grow on trees’ lesson.
For very young kids, that might mean giving them a coin for doing a simple task.
Older kids might benefit from set amount of pocket money each week for doing a set amount of chores.
For even older kids, getting a part-time job and all the obligations that go along with it is an excellent education.
The main thing is that kids learn at all these stages that if they don’t do the work, they don’t get the money.
These apps can help you set and track pocket money:
2. You need financial goals
For a kid without a goal, you earn a dollar, you get to spend a dollar.
Actually, that’s true for everyone, not just kids. Without goals, it’s a bit too easy to spend what you earn. You happily live in the moment, accumulating experiences and things that catch your eye at the time.
We all know where that generally leads in the long term: debt. Because eventually you start to want things that cost more than the money you’ve got in your hand.
Instead, we need to teach our kids the value of having a goal to save their money towards. It might be a particular toy they’ve got their eye on. It might be a special activity they want to do. Either way, having a future something to put money towards is an important lesson for a child to learn.
3. You need to have a plan
Once you know that you’ll need to accumulate money towards a future something, it’s time to help your child create a plan to get there.
The basics: How to create a personal finance plan in 45 minutes
A financial plan for a kid might be as simple as:
- Save 10% towards their future something
- Spend the rest now
But if you’re really serious about what you teach kids about money, that formula might look more like this:
- Save 20% towards their future something
- Save 20% into a general future fund
- Spend 50% now
- Give 10% to charity
4. You need to have a budget
Every parent will be familiar with the drip, drip, drip of kids and money. Little kids are constantly asking to buy something and older kids are constantly asking for money.
It may be worthwhile upping your kids’ allowance to an amount that covers everything they need for the full week. Then it’s up to them to budget their money to cover their expenditure. They can track their expenses using an app like Spriggy or Bankaroo.
5 of the best budget apps to help keep you on track
The percentages approach to divvying up money outlined above is a good way to start a budget for kids. There are other approaches outlined here: Which budgeting methods are the right ones for you?
Setting a detailed budget is also a terrific exercise to teach kids the difference between ‘needs’ and ‘wants’…
5. You need to work out your needs versus your wants
Being able to differentiate between what you truly need and what you just think you need is a lesson that will help your kid for life. It’s part of the bigger life values talk. Who am I? What do I like? How important is money to me? What else matters to me? How can I best live my values? What kind of person do I want to be?
More on this: Knowing your values can help you manage your money
Of course, those are all massive questions that many of us spend our whole lives trying to answer, but you get the idea. Teaching kids about values is the key for helping them spend their money on what is truly important to them: 5 steps to align your values and your spending habits
So, let your child decide what they want to buy – this is their choice, not yours. But do ask them a few questions to help them solidify their choice:
- Can you afford it?
- Can you buy it cheaper elsewhere? (ie. learning to shop around for the best deal cannot come soon enough!)
- How long will you use it for?
- Can you borrow it from a friend to see if you really like it?
- Can you wait few days before buying it?
The last question is key: they should commit to waiting a few days before they make their purchase. Chances are, they’ll have forgotten all about 80 per cent of the things they thought they wanted. The other 20 per cent that they can’t stop thinking about, they should buy with joy.
Good lessons: 3 simple tips to stop overspending
6. Saving money should take a long time
Here’s where you hammer home the value of compound interest as much as you possibly can.
Like this: Behold the mighty power of compounding
Investing and saving should be long-term commitments to really get value from them. That’s why you should teach your child to save one part of their allowance towards something they want now, and another percentage towards an unspecified future fund.
There’s a chart here that should help older kids understand the value of compounding your savings.
It’s a bit tricky in the current low savings account interest rates, so it’s worthwhile opening an investment fund on behalf of your child to stash their ‘future fund’ savings. A company like Stockspot or Spriggy make this easy. Both of these options have clear charts that help kids track what their money is doing.
Saving for the future can be hard for kids, so it might be worthwhile incentivising them to keep going. Matching their saving or investment dollar for dollar or by a certain percentage can be enough to keep them going.
7. That credit means debt
Once your child is older, it’s time to talk about credit.
There will most likely be times in their life where they need to buy something that they haven’t saved enough money for. Well, hopefully it won’t come up too often if they’ve been raised on these money rules – but sometimes.
Learning about how credit works at a young age is particularly important because it means they will also learn about debt. Because if you ask for credit, you have to pay it back and there are rules for that.
The biggest rule is about interest rates. How borrowing money means you’ll end up paying more for something.
Best advice: How to break the debt cycle
Perhaps there is a toy (or skateboard or car) they really, really want but it costs $10 and they haven’t saved enough money. Tell them you’ll lend them the money, but you’ll charge 50c in interest every week until it’s repaid.
Once they realise that you’ll keep adding 50c to the $10 total, they might change their mind. Especially it they can only afford to make 75c repayments on the loan each week!
If they don’t, it will be an excellent education in how easy it is to get into debt when you take on credit.
8. The reward of giving back
There are plenty of ways to give to others (time and kindness spring to mind), but there’s nothing quite like giving money to charity to really bring it home.
At the beginning of this list, I suggested your child allocating 10 per cent of the money they earn towards charity. Putting the money they plan to give away right up front is how you make it important. Setting things up so it consistently goes towards a charity of your child’s choosing is how you make it count.
I have always found that co-sponsoring a child along with your own child is a valuable way to raise a charitable person. I think it’s the fact that they can learn about their sponsor, a child just like them. Further research into the lives of people living in countries not as privileged as their own can be really eye-opening.
Taking care of others is such an important value to foster and if you can do it alongside a good money lesson, well, that’s outstanding parenting.
Further resources to teach kids about money
- Teaching kids to be money smart starts at home
- What your kids want to know about money
- What should we teach children about money?
- Stocks to buy to build a Future Fund for kids and grandkids – updated
- How to make your kids rich
- 3 good money tools for kids
- 4 money lessons I wish I learned in high school
Find the rest of our Money Focus series here.
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