It can be difficult for kids to really get what the whole deal with this “money” stuff is without learning certain money lessons. They see food appear on the table and feel cold air coming out of the AC without realizing it’s because mom and dad go to work and earn money to pay for these things. One day they will need to make that connection — because they themselves will become responsible for those same things.
While you wouldn’t want to worry your kids or make them anxious, preparing them for the day when they’ll be accountable for bills, retirement savings, and budgeting will help ensure a smoother transition into adulthood. And teaching your children about money and financial literacy is one of the best things you can do for them.
There is plenty to learn, but here are eight key lessons to make sure your kids are on track to make educated, healthy money choices as they grow up.
Money doesn’t grow on trees.
Kids may think that money is magical when they see cash from an ATM or when you swipe plastic cards to make purchases. Make sure they make the connection between working hard and earning! Speak to them about jobs and salaries, and to put things into perspective, share how many hours or days you need to work to pay for certain things they ask for. Even better, start giving them an allowance so they feel the value (and cost!) of what they want to buy. For kids under the age of seven, try paying with cash for everyday purchases. If you use a card, explain to kid that even when we don't use cash, we still spend money just the same.
Interest can be your best friend—or your worst enemy.
Interest is earned on savings accounts and other financial tools, by making your savings work for you. Or, it can add to the amount of loans or credit card debt owed, leaving you spinning your wheels trying (and maybe failing) to pay them off .
Introduce the concept of good interest and how it builds net worth by matching their savings with an interest rate of your own, or go over bank statements together. To explain interest on debt, see what they think when you charge them interest on money they borrow from you! Either way, they should learn that interest is super powerful, and should be treated with care.
Always beat inflation.
Inflation raises the price over time, so we end up paying more for the same things. It’s important for children to understand that to keep and grow the value of our money, we need to make at least the percentage of inflation as a return (or preferably beat it), otherwise our money ends up losing value.
Start introducing the idea of inflation to children between the age of twelve or thirteen and give them a leg up on building the value of their money over time. Give examples of what things used to cost when you were a child, and how much they cost today. Together, compare what they would earn from keeping the same amount of money in the stock market and an interest-bearing account based on the previous year’s inflation rates.
A key lesson: find a way to make sure your money is working for you.
Debt can be good!
When the long-term pay-off outweighs the short-term downsides, debt can be a tool and not just an obligation. Some kinds of debt allow you to access opportunities or increase earning potential, depending on how you manage it.
Explain how debt can be good by using examples from your own life, if you have any. Another way is to lend them money to start their own business. Help them assess their ability to repay you. Calculate how much allowance they receive, how much they earn from chores, and what profits they expect from their business. Emphasize that debt can actually be good for your financial health as long as it's paid off responsibly and used wisely.
Buying things on sale isn’t really saving.
How many times have you bought something just because it’s on sale? You may feel good about it, but the reality is that you’re still using money and not really saving. At the end of the day, more money is going out than coming in.
Since your kids may join you on your shopping or grocery store trips, it’s important to point out the difference. When you save money through discounts, it's good for your budget: it means that you’re spending less. Money you don't spend isn't added to your savings account unless you intentionally deposit it.
Ask them to put aside the difference between the regular price and sale price of items. No matter how they’re able to save, make sure that money goes into a separate place. For kids, this may mean a coin bank, bank account, or a digital account of their own.
Keep a budget instead of keeping up with the Joneses.
Spending money with intention instead of superficiality can be the difference between grateful, confident, and fulfilled kids and entitled, unsatisfied ones. A budget is the first step towards keeping track of spending and making sure you don’t veer off course. It’s one of the most important, basic money lessons you can instill in your kids from a young age.
Help them plan their weekly expenses ahead of time, and ensure they put some money aside. Explain how part of budgeting is goal-setting, and this could be the golden ticket to a special treat!
Money can’t buy happiness, but it can make life a whole lot easier.
Sometimes we portray money as the root of all evil, but that’s not the case. Money may sometimes come with negative connotations like greed, materialism, and distraction, but it can also lead the way to a healthy life. Happiness doesn't come directly from money. Yet, it can help fix stressful problems and open up opportunities. It can also be used to make the world a better place for ourselves and others.
Set money aside for charity.
Donating money is really an offshoot of one of the main lessons of childhood: sharing is caring. As you teach your kids the other basic money lessons—mostly centered around increasing personal wealth—be sure not to forget the flip side: give what you receive, receive what you give. It’s basic karma! It’s a great opportunity to share your family values and work towards what matters most to you, together.
What’s the most important money lesson you’re teaching your kids?