Every parent wants to raise kids who are humble, generous, and eventually, financially-literate young adults. The good news is teaching kids about money is totally doable, even if you've faced a few dollar dilemmas in your own life.
The challenge that this involves is not giving them everything they want, even when every parental impulse you have wants to do just that.
According to research by T. Rowe Price, 58 percent of parents admit they spoil their kids; of those, 75 percent confess they spend too much on things their kids don't really need. Not only can such overspending be a detriment to your own finances, it could also set your children up for financial failures—and a cruddy credit score, to boot—later on in life.
Your job is to change your mindset from worrying that you're not giving your kids enough, to instead considering what your own money behaviors are teaching them.
Everything from how you talk about money, credit cards, your bank account, and your own spending habits, to if and how you introduce money concepts to them, including proper credit card usage and how that will ultimately affect your credit score, can either pay dividends throughout their lives or set them up for financial struggles. As one survey by the Financial Education Council shows, 76 percent of college students wish they had more help and guidance from their parents to better prepare them for their financial futures.
Luckily, it's never too late to start building your children's dollars-and-cents sensibility, and the time to get started is right now.
To follow are the best expert-driven, time-tested solutions to help you instill in your children a solid financial foundation that they can—literally—take to the bank.
CASH CONVERSATION STARTERS
1. Make money a tangible concept. "No, junior, money doesn't grow on trees (or come from machines)." As Parents reports, kids can begin understanding the basic concept of what money is, and what it means to pay for things around age 5. Here's how to ensure they reach some good money habits milestones by connecting the "where cash comes from" dots:
- Be mindful of your spending around your children. "I'm a big believer in kids learning by example," says Tracie Fobes, founder of PennyPinchinMom. "It all comes back to what mom and dad are doing, and practicing what you preach." Some apply-it-now advice: Before you blow that extra pocket money you have, let them see you look at the price tag on a handbag, pull up your spending budget on your phone, and replace the item on the rack because you really don't have the disposable income to pay for it right now.
- Walk your kids through large purchase decisions. Your child may assume you bought a new TV simply because you wanted it. Instead, point out that you worked overtime or saved up for months in order to afford it, or that you waited until it went on sale, or your older model stopped working. Do this in the form of a family discussion around the dinner table, by hopping onto price-comparison websites to show them the pros and cons of TVs you were considering, even that you considered opting for a refurbished model at a discounted price.
- Watch the plastic. If you're always swiping to pay, take the time to explain that the amount you're putting on that credit card will have to be deducted from your "real money" budget—and bank account— to pay it back. Oh, and that there are consequences—if you don't pay it back right away, there will be a penalty. You can start explaining the concept of credit card use and one's subsequent credit score by comparing it to a game—the better you are at it, the higher your score.
- Demystify the ATM. Going to the cash machine might seem like a magical concept to kids, but explain that it's a grown up way of taking your own money out of your own piggy bank ("Mommy and Daddy's piggy bank is down the street in that big building where ur bank account lives."). You can even walk them into your bank and ask a teller to show them that there's a back side to the machine. While you're at it, make a deposit, and explain how the money you're putting in is what comes out of the machine later, when you need it. Finding ways to describe transactions in "kids money" terms can help the lesson sink in.
2. Money talks, and kids listen, so send the right message. Do you fight about money with your spouse in front of the kids? Or worse—whisper about money problems, while looking stressed out? To instill in your kids a healthy relationship with money, stop making it a taboo topic and do this instead:
- Have regular money meetings with your spouse. Consistent communication can help avoid kids money misunderstandings that lead to bickering. While you won't want to talk finances on date night, set aside some time to have a cash chat about your bank account, credit cards, how you each use your pocket money, etc.—while you're bored to tears waiting in the carpool line, perhaps?
- Avoid phrases like "we're broke" or "we'll never be able to afford that." Instead, try "it's not in our budget right now," or "that's something we can try to save up for." Kids absorb everything, so make what you say count.
- Show pride for what you have. It's OK to fantasize about a dream house once in a while, but emphasize that taking care of your family's needs and being happy together is what's most important. "Your kids will learn about money from someone. Please don't let it be from an out-of-control reality TV star," says financial expert, Dave Ramsey.
3. Show them the money—literally! Be forthright about what you earn and how much things cost. Using real-life, age-appropriate examples of how cash flow works can help children understand the value of a dollar. Some strategies to try according to U.S. News & World Report:
Share a "big picture" visual. Pull up your family's budget on your computer as a spreadsheet or get a free template to print out to demonstrate where money flows in (mommy and daddy's paychecks) and out (paying house bills).
- Hand your kids a calculator. Let them add up some of your monthly bills—even if it's just a stack of grocery receipts–so they can get a sense of what things cost.
- Be open about your earnings. While you don't have to hand over your W-2, you can share that you earn $25 per hour, for instance. Then, go on to explain that you have to work four hours to earn enough to pay for the $100 cable bill.
4. Practice with play money. Pairing money lessons with fun activities from an early age will help make more complex financial math less intimidating later on. "We introduce financial concepts through fun learning activities that are a regular part of the lesson plan," says Dr. Craig Bach, VP of Education for The Goddard School. You can do the same at home:
Play a grocery game. "Children love to pretend-shop for groceries and other items," says Bach. Give your child a few fake bills (print some here—coins, too!), put price tags on different household items, and encourage them to shop wisely.
- Pull out classic board games like Life or Monopoly to practice counting and making money decisions. Let them be the banker in charge of everyone's bank account. You can't put a price tag on empowerment!
- Download some fun money apps for kids like Bankaroo that teaches banking skills and SavingsSpree, which gets into making financial choices.
5. Shower them with cash. Periodically filling a piggy bank or bank account for your child is missing out on the chance to teach them about saving. Instead, giving your child a regular income from an early age will help them develop good money habits. For kids who are eager to learn, it can help them hone their money management skills. Here's how DailyWorth advises using allowance as a teaching tool:
- Decide on an allowance system that works for your family. Some parents tie it to chore completion, while others treat allowance separately.
- Choose an amount. Many people use the one dollar per years old formula, so a 5-year-old would get $5 per week, a 10-year-old would get $10, etc.
- Consider offering bonuses. Fobes says she does this when one of her kids takes the initiative to do something extra helpful or kind, like entertaining a younger sibling when they'd rather be doing something else.
- Choose a payday. For example, Saturday morning after breakfast.
6. Implement a jar system. Once you get an allowance going, the next step is to teach your child how to allocate funds toward different goals. Think of it as a precursor to managing an adult budget. Setting up a jar system is simple:
Get three clear glass jars (so kids can actually see the money piling up). Label one for spending, one for saving, and one for giving to a charitable cause of the child's choosing.
- Choose a percentage for each goal. In his book, "The Opposite of Spoiled," New York Times personal finance columnist Ron Lieber recommends putting 80 percent in the spending jar, 10 percent in the savings jar, and 10 percent in the giving jar.
- On payday, have small bills on hand so kids can easily divide the money. For example, if your child gets $10 per week, you could give a $5 bill and five singles so he or she could easily put $1 into savings, $1 in giving, and the remaining $8 in spending.
7. Discuss wants vs. needs—often! Learning that you can't always get what you want is perhaps the most important, but hardest learned, lesson. Try this before your next shopping trip:
- Make a shopping list, placing items in either a needs or wants column. A pair of sneakers might be a need if your son outgrew his last pair. But the latest LeBron James style would be a want.
- Tell your child the dollar amount you are willing to pay for their need (i.e., $40 for new sneakers.
- Explain that if they choose a more expensive pair, the difference must come out of their spend jar. Lieber refers to this as the "Lands End line." "We'd pay whatever Lands' End (my definition of a suitably mid-priced merchant that makes quality clothing) would charge for any clothing needs," he says, and kids have to pay the rest.
8. Teach some tough-love budgeting. Sometimes the best way to learn is by making mistakes. “It takes tremendous strength and resolve to allow your kids to suffer the consequences of their decisions," says Ramsey in his book, "Smart Money, Smart Kids." Give your child room to experiment with money:
Instead of forking over cash for each item ($2 per day for school snack and drink; $10 for a movie ticket; etc.), see how your child does when given a lump sum for a full week's worth of their expenses.
- Explain that you're giving them $25 up front, for example, but it must be used to cover snacks, beverages, entertainment, etc. So if they know they want to see a movie on Friday that costs $10, they have $15 to allocate for snacks for the week. You can offer suggestions to help them along (such as if you pack snacks from home for a couple of days, you will have enough left to buy movie popcorn, too), but ultimately, the choice is theirs.
- Here's the biggie: If they blow through their budget early, don't cave and dig into your pocket money to supplement—save—them. That's right ... if they're coming up short for the movie outing, they miss the movie. Period. “It takes tremendous strength and resolve to allow your kids to suffer the consequences of their decisions," says Ramsey in his book, "Smart Money Smart Kids."
9. Learn to say no. Occasional gifts or treats are fine, but writing a blank check does more harm than good. Or, put another way by a blogger for TheCollegeInvestor, spoiled kids who get everything they desire grow up with "no drive, no ambition, and no goals... Why work hard for something more when they barely have to work at all?" Here's how to ensure you're not overindulging your child:
- Don't apologize for not being able to afford something. Just state the fact that the item they want isn't in your budget right now. As financial blogger Steph Wagner explains, "The longer I stared at my year-end credit card statement, the more I realized the power that lives in that simple, two-letter word: 'No.' I began to see that if I embraced the notion that “no" actually means “yes" to something else (e.g., zero debt, a growing emergency fund and/or a retirement account, a better credit score), the results could be life changing."
- Reconsider using bribes to get your child to behave. Many believe that sends the message to your child that acting out will get you to take out your wallet, or that every good behavior requires payment. Instead, find other ways to reward your child, such as simple verbal praise, or stars on a sticker chart.
- Put the ball in their court. If your child is persistent about wanting something, remind them about the spending jar they have at home, and encourage them to keep saving.
10. Get real about brands and labels. Your kids pick up on your own desire for designer items, of if you're envious of the neighbor's car. Here's how to turn the message around:
- Point out that even though you think the latest iPhone is cool or the lip gloss Kim Kardashian uses is glamorous, it's important to be grateful for the versions you can afford.
- Try to keep the focus on an item's functionality versus the brand name. A school backpack has a specific utility—to carry books—so choosing a pricier style doesn't necessarily add value.
- Explain that it's OK to enjoy the "finer things" sometimes, but only if you budget for them.
- Remind kids that "if you want this, then you can't have that." Fobes explains that they may shop at discount stores year-round, but then they are able to afford a family vacation to Orlando. This can encourage them to value experiences over material things—one of the most important money habits of kids of all!
11. Play the waiting game. Delayed gratification is one of the most important (and hardest) things to learn in today's instant-everything world. Here's how to make the lesson stick:
- Work with your child on a game plan to save money toward the item they want. Financial writer Miranda Marquit used a sticker chart to help her young son conceptualize how long it would take to save for a Transformer toy he wanted. "We figured out how many weeks of allowance it would take to save up. Every time he received his allowance, he would put a sticker in a square. This way, he could see himself getting closer and closer to his goal."
- If a birthday or holiday is coming up, suggest they ask for money instead of gifts to fast-track their goal.
- You can also reward sacrifices. For instance, in addition to saving his allowance for four weeks straight ($32), perhaps your son also gave up his school snack money in order to get to his savings goal more quickly (adding another $20). Kicking in the remaining $23 for the $75 video game he wants will show how proud you are of his efforts.
12. Wage war on waste. Putting a real dollar amount on wasteful behavior will show kids there's a real cost to buying things you don't use, and hopefully, will encourage them to be more resourceful.
- The next time you clean out the refrigerator, pantry, or closet, have your child assist.
- As you throw out or get rid of items, keep a tally of the approximate dollar amount wasted, suggests Bill Dwight, founder of FamZoo, a family finance app and website. So write down $3 for spoiled strawberries, $3 for moldy bread, $5 worth of expired yogurt, etc.
- Once you're done, give an example of what you could have paid for with the total amount. So for example, if you threw out $28 worth of spoiled food and leftovers, that could have paid for an afternoon of bowling.
- List some other costly but less obvious behaviors that waste money like leaving lights on, taking long showers, etc., and explain that saving energy can lower your utility bills—and boost your bank account.
13. Teach comparison shopping. By turning deal-hunting into a family affair, kids will learn that with a little effort, you never have to pay full price. Try these tricks to get them on board:
- Show the savings on grocery receipts, and challenge them to figure out how they could have done better. TheMint.org's "Grocery Store Challenge" has great tips on how to gamify your supermarket trips. (And don't forget the simple Sunday-afternoon activity of clipping coupons together.)
- Fobes says her Internet-savvy tween helps her find online discount codes.
- Point out the price differences in store aisles for similar items.
- Show them the benefits of the hard work, says Fobes. "Because we saved this money, we can do something fun as a reward."
OLDER KID CONCEPTS
14. Introduce borrowing. Older kids can grasp more complex money topics, including how loans work. Try practicing using a "lemonade stand" concept, advises Lisa Germano, CPA, CGMA and member of the AICPA's Consumer Financial Education Advocates. Here's how:
- Lend your child a small amount, say $25, to buy supplies for their lemonade stand.
- Explain that he or she will have to sell at least $25 worth of lemonade in order to break even.
- If your child earns $40 for the day, explain that the IOU for $25 still remains, but after paying it, they will have earned a $15 profit.
- If your child chooses not to pay back the loan right away, use it as an opportunity to explain interest. You can say you'll charge 5 percent interest per day, taking the debt to $26.25 on day two, and so on.
15. Discuss healthy credit habits and the impact they can have. "By teaching your children about credit cards and credit scores before they start college, you can ensure they have the knowledge necessary to begin using credit responsibly," says Nancy E. Bistritz, a spokesperson for Equifax, one of the three main credit bureaus. Here are some credit lessons to share:
- Break down a credit report and credit scores in teen terms. You can compare it to a school report card, explaining that people are "graded" on how they perform in different money categories, such as whether or not they pay their bills on time, and how much debt they are carrying.
- Pull your own (or find a sample online). Seeing a real credit report will illustrate the fact that all financial activity is being monitored, including what you owe, your payment history, when you opened each account, and how your credit score holds up against others.
- Explain why good credit matters. Whether it's buying their first car, getting an apartment, or in some cases, applying for a job, lenders and others will consider your credit history as part of their screening process.
16. Move from the savings jar to the bank. Older kids should graduate to a real savings account, especially if they're beginning part-time jobs.
- Treat it like an exciting rite of passage, and take the child with you. As TheSimpleDollar suggests: "If your bank offers suckers and stickers to its pint-sized visitors, make sure to take advantage. You want your child to see bank visits as a fun and rewarding experience, and making the process enjoyable is one way to reach that goal."
- Discuss a realistic savings goal together, such as "I want to save $500 by the end of the year."
- Log on to the account online or review monthly paper statements together to watch the balance grow over time.
- Make adjustments to achieve the goal, whether it's earning extra money, or setting aside a percentage of any monetary gifts received.
Teaching your kids good money habits that can grow with them is almost guaranteed to pay off in the long run—way beyond their bank accounts. Just as you teach them about good manners, taking care of their bodies, and keeping their schoolwork organized, teaching financial smarts is something they will take with them throughout their lives.
As for the consequences of sending mixed money messages, buying them everything their little heart's desire, or choosing to avoid discussing money matters all together? It's not an exaggeration to say you could be setting them up for a lifetime of poor decisions and crippling debt.
Instead, modeling good behavior, offering lots of opportunities to practice budgeting skills, and keeping kids in the family finances loop–as illustrated in the strategies above–will be some of the best parenting investments you end up making.