Updated January 19, 2024.
How often do you talk to your children about money? The discussion surrounding financial literacy for kids often takes a backseat in parental guidance, despite its crucial importance in shaping a child’s future understanding of the importance and meaning of money.
Initiating this conversation can be intimidating, especially when compared to other important topics. Our clients understand the importance of preserving their wealth and also consider its impact on their children. It’s crucial to shift our perspective and see educating children about money as an enriching journey, rather than solely focusing on numbers. This journey serves as a tool to explore family history, instill core values, and encourage thoughtful consideration of present and future wealth.
Talking to kids about money: when is the right time?
Even during early childhood, simple introductions to the concept of money can be beneficial. A University of Michigan study, co-authored by Craig E. Smith and Margaret Echelbarger, revealed that children as young as five exhibit distinctive emotional responses towards spending and saving money. These reactions align with their actual spending habits in real-life scenarios. Interestingly, the study also indicates that these financial behaviors and emotional responses may not necessarily mirror those of their parents. The results suggest the necessity for initiating these important discussions earlier than anticipated by most parents.
Begin by involving children in everyday activities from a young age, like grocery shopping or budget planning. This simple approach instills valuable life skills while transforming the idea of money into something concrete, rather than an elusive concept. Engaging them with questions, for instance, “You have 8 dollars for a treat; would you choose ice cream or candy?” helps children grasp the concept that choices have consequences, and money is a finite resource.
Activities to Spark Discussions about Money
One great way to introduce the concept of money to young children is through games and role-play. Games such as “Monopoly” or “The Game of Life” provide a platform for children to experience earning, saving, and spending money in a fun and relaxed setting. Another strategy is to set up a pretend store at home where children can “buy” items with play money. This not only helps them understand the concept of exchange but also gives them the chance to practice their math skills.
Reading stories about money can also be an interesting way of initiating this conversation. Books like “Just Saving My Money” by Mercer Mayer or “Alexander, Who Used to Be Rich Last Sunday” by Judith Viorst can help children grasp the concept of saving and spending.
Lastly, a good old-fashioned piggy bank still works wonders in helping promote financial literacy for kids. Encourage your children to save their allowance or any money they receive. Then, help them divide the savings into three categories: spending, saving, and sharing. This can help them understand the importance of managing money while also teaching them about generosity, philanthropy, and responsibility. It’s all about making the learning process interactive and relatable, and ensuring that the conversations continue as they grow older and their understanding of money evolves.
The Transition to More Complex Conversations
As children grow older, it is crucial to gradually introduce more complex financial concepts. By the time they reach middle school, they should have a basic understanding of saving and simple budgeting. This is an ideal time to introduce concepts such as interest, loans, and investments. For example, if a child expresses a desire for an expensive item, parents can use this as an opportunity to introduce the idea of saving. If they receive an allowance or earn money, they can set aside a portion of it each week or month until they have enough for the purchase.
For high school students, conversations about money should become even more specific and practical. They should understand how credit cards work, the importance of maintaining a good credit score, and the impact of student loans, if applicable, on their financial future. They should also be encouraged to take on part-time jobs and internships to understand the value of money and the effort it takes to earn it.
Finally, as they approach adulthood, discussions about long-term investments, retirement planning, insurance, and taxes become relevant. While these topics might seem complicated, they are essential for a comprehensive understanding of financial management. The aim is to ensure that by the time they leave the family home, they are equipped with sufficient knowledge to make informed financial decisions.
Honesty is a crucial component of any relationship, particularly when dealing with your children about matters of wealth. By being transparent, you foster a healthy understanding of financial matters, which can prevent a sense of entitlement or misunderstanding in their later life. This open dialogue can also help them develop sound financial habits, like saving and spending wisely, which are vital life skills. However, always remember to pitch these conversations at an appropriate level for their age and understanding, to ensure the discussions are effective and beneficial.
Emphasize values, not numbers
While it’s essential to maintain transparency, it isn’t necessary to delve into the particulars of your income, net worth, or potential inheritance. Fortunately, your children are not particularly interested in or in need of that information. What they truly require are fundamental concepts around what money means to them. Teaching kids the value of money provides them with important tools for navigating their future financial lives. This includes understanding the effort required to earn money, the importance of saving and budgeting, and the concept of delayed gratification. By allowing children to earn their pocket money through chores, they are given a practical experience of earning and valuing money. Encouraging them to save for things they want helps them understand the concept of budgeting and patience. Through these exercises, children are not just learning about money, but also about hard work, determination, and the value of planning for the future.
Promote family participation
Engaging your children in the family finances is a valuable hands-on opportunity to educate them and offer real-life insights into how their financial habits will shape their future. For instance, perhaps you set a grocery budget of $500. Take your children to the store with you when you shop and have them keep your cart on budget. Another idea is to have kids help plan a vacation staying within a budget. By involving them, you empower them to understand the impact of their choices and cultivate important financial skills.
Involve your children in philanthropy
Incorporating philanthropy into your family’s financial education is a powerful way to instill values of generosity and gratitude in your children. From early childhood to young adulthood, practical involvement in giving serves as a transformative learning experience. For younger children, stories about your own philanthropic endeavors and a three-part “giving allowance” provide an engaging introduction to giving and finances. Teenagers can be encouraged to volunteer for causes they feel passionate about, and even be given a budget for discretionary giving. As your children get older, their role in discretionary giving can be expanded, and participation in charity committees or next-gen board memberships can provide invaluable leadership experience. These tangible practices of philanthropy can be an effective platform for ongoing conversations about giving, underpinning their financial literacy with an understanding of generosity, responsibility, and empathy.
We’re here to help
Remember, financial literacy for kids is not a one-time conversation but a continuous dialogue that evolves as your child grows. It’s a journey that you and your child embark on together, with each stage offering new opportunities for learning and growth.
It’s perfectly fine if there are certain financial topics that you may not be well-versed in. Use this as an opportunity to learn alongside your kids. By demonstrating your interest in expanding your knowledge of financial matters, you’ll spark their curiosity as well. At Keystone, we wholeheartedly welcome all family members to participate in our financial meetings. Most of our clients express worries about not just safeguarding their wealth, but also the influence this wealth may have on their offspring. There is no better time than the present to start sharing your values on wealth with your children. The Keystone team is here to support you in preparing for and navigating these important conversations, and to assist you in educating your children so they can develop a healthy and responsible relationship with money that will benefit them throughout their lives.
The information and opinions provided in this material are for general informational purposes only and should not be considered as tax, financial, investment, or legal advice. The information is not intended to replace professional advice from qualified professionals in your jurisdiction.
Tax laws and regulations are complex and subject to change, and their application can vary widely based on the specific facts and circumstances involved. Any tax information or advice in this article is not intended to be, and should not be, used as a substitute for specific tax advice from a qualified tax professional.
Investment advice in this article is based on the general principles of finance and investing and may not be suitable for all individuals or circumstances. Investments can go up or down in value, and there is always the potential of losing money when you invest. Before making any investment decisions, you should consult with a qualified financial professional who is familiar with your individual financial situation, objectives, and risk tolerance.