Teaching kids about money: How to raise money-smart kids

A few years ago, I polled my Twitter followers to ask: “What did your parents teach you about money? Anything? Did it work?

A lot of folks responded to say that their parents were poor examples:

  • @MoneyMateKate wrote: My parents didn’t teach me — I taught them! I was paying my own dental bills (no insurance) from age 12 onwards with babysitting dollars.
  • @liberryteacher wrote: My parents never had any money, and life was hard. So they taught me by example that that was not a good way to live.
  • @mike_strock wrote: My parents gave me money whenever I asked. Needless to say, that wasn’t helpful later in life. I’m learning!
  • @tcita wrote: My parents taught me absolutely nothing: no chores, allowance, budgeting, spending money, savings — nothing. Though I guess that taught me value of work.

But not all parents fail at training their children about money. Plenty of folks picked up good habits from the Bank of Mom and Dad. Here are some of my favorite anecdotes and tips:

  • Pam from The Turtle Path (a running blog) told me: In junior high, my parents gave me $400 at the beginning of the year (instead of a weekly allowance). They told me I could do whatever I wanted with it, but they weren’t giving me any more money the rest of the year, so don’t ask.
  • @Elle_CM wrote: My mom (and grandma) emphasized always saving a chunk of any income you receive. We used to make Saturday deposits at the bank.
  • Via Facebook, Cynthia wrote: As kids, if we were at the store and saw something we wanted, my dad would say, “Did you bring your money?”
  • @mattwakefield wrote: My dad taught me about the stock market by using a 1/100 scale model of the [stock] market. Got hooked early!
  • @EverydayFinance wrote: My father insisted on no credit-card debt and said, “Everything in moderation.” It worked like a charm.
  • @kingkool68 wrote: My parents printed family checks for my allowance. I could write checks to my parents in first grade! They also gave me monthly statements.

Teaching your children about money is one of the best things you can do to ensure their future success. Financially aware kids become financially aware adults.

How do you teach kids about money — especially if you haven’t yet figured out money for yourself? This is a tough question for me to answer since I have zero experience raising children. That said, I’ve paid close attention to the experiences of my friends and family over the past twenty years. While I don’t have any personal experience with this subject, I’ve observed what has and has not worked for others.

Teaching Kids About Money

The Opposite of Spoiled Some parents try to shield their kids from the family finances, but this often does more harm than good. From the parents I’ve spoken to, the ones whose kids seem to have the best handle on money are the ones who’ve seen how Mom and Dad deal with money, both the good and the bad. If they see the challenges you face, they can prepare for them in their own lives.

A few years ago, I chatted with New York Times columnist Ron Lieber about his book The Opposite of Spoiled, which is all about “raising kids who are grounded, generous, and smart about money”.

“How do children become spoiled?” I asked.

“They’re not born that way,” he said. “We do it to them. Nobody wants to raise a spoiled child, yet it happens all the time.”

“When we talk about spoiled children,” Lieber told me, “the opposite qualities are modesty, patience, thrift, generosity, perspective, perseverance, courage, grit, bravery, prudence, and so on.”

“The thing is,” he continued, “you can use money as a central tool to teach kids about every single one of these. Instead of shying away from the topic, what if we put money at the center of family conversations? What if we assumed not that money subverts values but contributes to them? Because it does. This is the path to financial literacy and financial education.”

From what I’ve seen, there are four steps parents can take to teach their kids smart financial habits:

  • Set an example. Model the behavior you want your kids to learn: If you want them to save, save. If you don’t want them to become compulsive shoppers, curb your own compulsive shopping.
  • Be prepared. Have answers before you need them. Know how you’re going to handle specific situations like allowances or begging for candy in the grocery store. (I know one couple who deflect begging by simply saying, “Sorry, that’s not in the budget.” I love it!)
  • Be consistent. Kids do best with clear, consistent expectations, so think carefully about your family’s money rules before setting them. Don’t be so rigid that there’s no wiggle room but once you’ve set a policy, apply it consistently and fairly.
  • Be honest. Share your success and failures. Tell your kids what you did right and what you wish you’d done differently. Explain your thought process each step of the way.

Most of all, make this learning process interactive. Involve your kids in frugal activities that teach them self-sufficiency, such as gardening, baking, home improvement, and so on. Teach them to comparison shop at by having them help at the grocery store. As they get older, make them financial apprentices: Show them how to pay bills, check a credit score, and buy a car. Teach them that managing a household is a team effort.

Providing Hands-On Experience with an Allowance

One of the best ways to teach kids about money is to give them hands-on experience with an allowance. When they have their own cash to manage, kids are better able to learn the value of saving and the difference between wants and needs.

There are two schools of thought about how allowances ought to be provided.

  • The first says that the money should be tied to grades, chores, and behaviors. This gives kids an incentive to do the right thing. But critics argue that tying an allowance to these actions sends the wrong message. Kids should stive for good grades regardless of what (or whether) they’re paid, say the critics, and doing chores is part of belonging to a family.
  • The second camp says that you should give the allowance without expecting anything in return. Using this method, kids learn about money even if they don’t make good good grades or do their chores. But some people believe this method leads to an “entitlement mentality” in which the kids expect something for nothing.

Most families are probably best off with some sort of hybrid approach: Provide a minimal base allowance that’s paid no matter what, and then add incentive pay for certain chores and behaviors.

Tip: If you want to incentivize good grades without money, consider rewarding with something else your child values: a later curfew, a trip to a concert or pro sporting event, golf lessons, more time with friends. This should encourage the behavior you want without tying it to money.

Whichever method you choose, use the allowance as a chance to teach your children the value of money. Instead of letting them spend it on whatever they want, consider a system that divides the money for specific goals.

You might, for example, use three jars (or envelopes) labeled:

  • Save (30%). This money is for long-term goals, such as buying a bike or a baseball mitt. Let the child decide on the goal — with your help.
  • Share (10%). The money in this jar (or envelope) is for giving to somebody else. Your kid can decide where it goes — whether it’s a charity or just somebody else in need (even a sibling!). The point is to share with others.
  • Spend (60%). There are no restrictions on the money in this jar. Your child can spend it on comic books or bubble gum — whatever strikes her fancy.

A decade ago, my friend Lisa tried this system. She wrote an article here at GRS about how she had her kids divide their allowance into four jars: Spend, Save, “When I’m Old”, and Donate. (If you don’t want to use jars or envelopes, you can now purchase money-savvy piggy banks with slots for Save, Spend, Donate, and Invest.)

An allowance is a great way to teach kids about money

Final Thoughts

Last month, my friend Doug from The Military Guide told me about how he raised his daughter to become a financially capable young woman.

“We got her involved from a young age,” Doug said. “My daughter got to see how my wife and I made financial decisions. But the best thing we did was to start her on an allowance. We gave her money and let her do what she wanted to do with it. She made some mistakes, sure, but we were there to help her. And I’m glad that she made those mistakes when she was thirteen years old instead of 23 or 33.”

I think Doug’s approach was smart. So far, it seems to be paying off. Now that she’s an adult, his daughter is making smart choices and is well on the path to future financial independence.

Many of us were raised with faulty and/or incomplete money blueprints. We entered adulthood not knowing how to handle money responsibly. I believe one your most important jobs as a parent is to give your children accurate, reliable money blueprints that will help them establish a solid financial foundation — then construct a life where they don’t have to worry about money.

Ultimately, the most important thing is to get your children thinking about and interacting with money from an early age. It’s better for them to make money mistakes at thirteen years old than at thirty!

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There are 15 comments to "Teaching kids about money: How to raise money-smart kids".

  1. Dave @ Married with Money says 13 February 2018 at 06:27

    This is always a fascinating subject for me to read about even though we’re not having children. I still find it interesting how early conversations and interactions with money have such an impact on your thoughts about money later on in life.

    I never got an allowance BECAUSE I did chores or anything like that. Helping out around the house was expected. I lived in the house, I had to help take care of it.

    Later I did get some extra money helping my dad run his business (I’d sort checks for him for payroll and his other client’s work) but allowance was always there, no matter what, even if only a couple bucks a week.

  2. lmoot says 13 February 2018 at 07:42

    I asked my family before how or if they taught me about money, because I honestly don’t recall. They confirmed they did very little or made no effort to teach me finances. But they were an example that I follow today. Most of my family is very frugal. Living in houses after the mortgage is paid off, drive cars into the ground, not materialistic.

    Mom sewed my clothes. Dad got the rest of my wardrobe from Goodwill (until I hit middle school and refused), where he still shops today.

    I got a few dollars here and there for doing extra jobs. I didn’t get an allowance but I also never really had chores other than just picking up after myself.

    For the kids in my family I just talk to them about the benefits of having a saving habit I to adulthood, and the freedom it can bring.

    I tell them to challenge themselves to save 50% of their income (1/2 is easy for them to remember), which for them would be cash gifts.

    I drive home this message to the kids (ages ranging 12-14…haven’t started with the 6 year old yet), by giving them 2 equal bills for Christmas and their birthdays, and a sticky note on 1 that says “save”.

    It’s an easy concept for them to remember and surprisingly they actually listen. The 14 year old insists on saving both bills, but I try to remind him that it’s ok to spend some, otherwise what’s the point of saving. He wants to save for a car, and I told him that counts as spending, so just track it separately.

    But yeah, they really clung on to that simple rule of 50%, and look forward to their cash gifts…and I actually believe they are more excited about adding to their pile. Though it helps that they get whatever they want from their parents (2 of them have iPhone 7’s).

  3. Supermom says 13 February 2018 at 07:58

    I got my children debit cards when they hit high school and put a certain amount each month in their account. They are able to track their expenses as well as have a limit to spend unless they have saved from the previous months! 🙂 My daughter was embarrassed to pick up a pair of shoes as a teenager and come to the checkout counter and realize that she did not have enough money in her account. It was a horrifying experience for her as a 15 year old and she had to put the shoes back.She has never stepped into a store without checking and tracking her bank balance. :))

  4. JoeHx says 13 February 2018 at 08:29

    My parents taught me nothing financially; in fact, they were poor examples. At first, they were poor with money because my step-dad didn’t make much money. After he started making a decent income, I guess lifestyle inflation outpaced his income, because they never could figure out how he could make so much money, yet they never had any. They’re still at this place today.

    I guess part of the reason I am good with money today is because I had an example of what not to follow. This isn’t to say they were bad parents. They did take good care of me, and I never went hungry or anything like that.

    For my own kids, I like the idea of the multi-jar system. I’m unsure how I will tie money to chores or grades, or anything at all. Obviously, I will have to discuss this with my wife. We’ve got plenty of years to plan, though!

  5. S D Sullivan says 13 February 2018 at 09:16

    I raised two sets of kids. With our boys, who are now grown and on their own, we used the Save/Spend/Give method. At the time, it worked well with our older son, who was a natural-born saver, but did not work at all with our younger son, a natural-born spender. When they became adults, neither one of them did well with their finances after they were on their own. We learned the hard way that this method is fine for young kids, but useless as a way to train for adulthood.

    For our girls, we decided to do it differently. We switched from the “3 jar” method when they each entered high school. Now we basically just put a roof over their heads and feed them, but they have to buy their own clothes, school supplies, electronics, all the common expenses. This means their allowance is substantial, but they have to budget it out themselves and make their own decisions about what to splurge on and what to wait for. If they’re going to flounder with budgeting, I want them to do it while they’re still at home.

    In hindsight, I feel like we threw our sons to the wolves. I don’t want to do that with our younger kids.

    • Sequentialkady says 13 February 2018 at 13:36

      Dear SD,

      Do you think you were too hands on with the 3 jar method? My parents tried this for about one year when my brother and I were young and we resented the hell out of it. We had no say in the process. Your charity money was going to the church. You were saving $X just to save it. You could spend Y … but only on the stuff we approve.

      Why even bother giving us the money then?

      It lead to one of the few fights I can ever remember about money in our house.

      • S D Sullivan says 14 February 2018 at 06:43

        That could be possible. But the thing I don’t like about the 3-category method is that it doesn’t actually teach how to budget or plan your spending. It teaches how to save, but not how to spend.

    • Bethany D says 21 February 2018 at 19:47

      I’m from a family of five kids and we got a weekly allowance with a 4-way split:
      10% Sharing – tithed to our church (nobody griped about it because we knew they also gave 10% of dad’s paychecks)
      10% Long-Term Savings – into our bank accounts for college
      40% Spending – whatever we wanted
      and 40% Short-Term Savings – accumulated for 4 weeks then moved into your Spending.

      Our allowance wasn’t tied to chores, but we did have to use account books to track our spending. Most of us started doing babysitting or yardwork as teens to augment/replace our allowance. Lol, I remember that I did pretty well sophomore & junior years but all my regular babysitting jobs dried up my senior year so I had to go back to receiving an allowance – I felt like I was going on welfare! We were homeschooled and part of our highschool curriculum was a coursebook on consumer math: how to calculate %-off coupons, amortize a mortgage, pay off a credit card, balance a checkbook, etc. VERY useful skills!!!

      Some results of my parent’s method are consistent: all of us did go to college and we all use credit cards very cautiously. Some results are more mixed: everyone does know how to track their spending and rough out a monthly budget – but not all of us choose to do it. Two siblings are high-earning & high-spending, one is being a slow starter, one dances on the edge with occasional bail-out loans from the bank of mom & dad, and at the other extreme I’m a frugal saver with a penchant for reading about personal finance. And I doubt that a different kind of allowance would have made any difference in our basic personalities. But my parents did do a generally good job of giving us financial knowledge & basic skills; whether or not we choose to use those tools is now up to us.

      I have 3 children of my own receiving allowances now and I’m mostly following that same pattern – with a few tweaks. Generosity is important to us so we offer giving opportunities beyond just the 10%-to-church. And it’s working! Sometimes they just help us pick where our monthly charity donation goes, but other times their loving little hearts want to give their own “monies” to help too. As a kid my Short-Term savings was just an arbitrary amount, meaning it really functioned more like Period Windfall training; so I’d like to start getting a little more intentional with them about What we are actually saving for. Maybe pick a goal, put a picture on the jar, and then once they’ve saved up that amount they can decide whether to go ahead & buy it or change to something else. Thanks for the reminder that I do need to make that switch – they won’t stay little forever!

  6. S.G. says 13 February 2018 at 13:16

    We have had a hard time motivation to learn about money because my kids seem to be naturally non-materialistic (though my middle child seems to like money on principle). They don’t really care if they get much money from me because they get most of what they want as gifts (though we aren’t extravagant gift givers by any stretch), between Easter and Halloween get more candy than they can eat, and get sent cold hard cash as gifts from grandparents who live out of town. They occasionally do extra chores for a little bit of extra money, but they feel no necessity. This may change as they get older and want nicer things than a $40 tablet. My oldest isn’t in middle school yet. But right now in the child economy my kids are already FI :D.

    Therefore I teach them about money by making them part of the household decisions and explaining our real life budget. I ask them about what tradeoffs we should make as a family. For example we are trying to eat in more and save that money for a trip to Disneyland. We talk about how much groceries cost versus eating out, but then how long it takes to prepare things at home and clean up. Last school year I gave them each a budget and told them the minimum clothes they needed to buy and what we would do with extra money (Disneyland again). It was amazing how well they did and how much they had left. My older daughter has been my apprentice at the grocery store and we talk about volume price vs how much we’ll actually use of something before it goes bad. Thankfully my kids love numbers so they find it more interesting than boring.

    No matter the methods you use I think the important thing is to try to just have ongoing continual conversations at your child’s level. Even my 3 year old loves the concept of filling his piggy bank and getting a penny as a reward. But I’m able to talk to my oldest about amortization and depreciation because we’ve already talked a lot about interest and compounding and how money works in general.

  7. Michael King says 13 February 2018 at 15:02

    Yeah My parents started me on an allowance that had chores and included school work as well. I do know there was some pain points as I got older and smart about it and decided not to do certain chores because it wasnt worth the 5 dollars. I would advise anyone who does allowance to also talk about the importance of helping out and maybe making it somewhat of a zero-sum game.

    I also remember when I was older they came out with a debit card for kids it was essentially tied to a joint account and used exactly like a debit card though I think it had some extra protection so you couldn’t overdraw on it.

    I feel like the jars Idea isn’t the greatest I felt I got to learn more when I had 100% control over everything. I had to make tough choices such as do I buy candy that I enjoy once or get some Pokemon cards that I can get more enjoyment out of. Also, I think the first time I couldn’t buy something made me realize you need to save on my own. I just think if you tell them they have to put 60% here and there you are essentially removing the self-discipline and learned lessons one can experience. I think suggesting certain percents and giving them jars or methods to organize is fine.

    I would say try to combine rewarding effort and results. An example you get 1 dollar each time you complete your hw or study. Then maybe end of school you get 5 bucks for each A. I get that some people may see this as “bribing”. However, I think you are helping give immediate incentives to things that do not have an immediate value.

  8. Matt Spillar @ Spills Spot says 13 February 2018 at 17:19

    Great post J.D.! This topic is so important because many of our experiences and perceptions of money get shaped at a young age. My parents did a great job instilling proper money management skills. We learned the differences between “needs and wants,” earned an allowance, and my family lived a modest lifestyle. My dad also displayed that making time for family was more important than working all the time, as he was very present in our lives growing up and still is.

    I feel like many parents struggle with figuring out how much they should help their kids. Helping them not enough, can potentially set them up for additional struggle, but helping them too much has the potential to make them spoiled or enabling poor money skills. I think my parents found this balance really well.

    I wrote about an idea that my dad had last year that you and your readers may be interested in, where he essentially “bribed” my brother and I to read investing books. The deal was that we would get $100 per book we completed (plus writing a report about the book) and the money had to be deposited into our Roth IRA. I completed 4 books, and am working towards reading 5 more this year. Many people I’ve shared this idea with love it and want to use it with their own kids. It works out so well because it gives my dad peace of mind that I’ll manage money well, and he feels good finding a way to encourage me along my money journey while not giving out handouts.

    https://www.spillsspot.com/finance-blog/2017/05/08/dad-finally-got-reading-investing-books/

  9. BusyMom says 13 February 2018 at 18:13

    I just wrote about this yesterday. What a coincidence!

    Basically, it taught me that
    (1) I shouldn’t ever worry about what others would think when I make decisions.
    (2) Unexpected expenses are just around the corner
    (3) There is always some more expenses you can cut
    (4) It is okay to let your kids know about your financial situation.

    http://www.countdowntotranquility.com/2018/02/childhood-memories-financial-decisions

  10. Mariele says 14 February 2018 at 22:08

    Hmm. I was always raised to believe that, no matter what, your family was your sanctuary. They would provide for you, love you, care for you, and never judge you in ways that you couldn’t expect of anyone else. We were always very loving and not at all strict. I never really had an allowance–if I wanted something, I could have it, within reason.

    That would lead you to think that I was pretty spoiled, but the difference is that my parents struggled financially. A LOT. I was very exposed to it, and as a child, I remember sorting through everything I owned so that I could decide what to sell to help the family out. As such, I didn’t ask for everything under the sun! I pretty much never asked for anything, something I continue to this day, because the sacrifice it would have on my parents affected me far more than anything else I could imagine. So even though I COULD have things, I learned not to want things in the first place, which I think is a more important lesson. My parents tried to give me an allowance a few times, but I would just slip the money back into their wallet or bank account.

    To be fair, we were also a family that shared everything. My parents are actually my mom and aunt, identical twins, and, well, being twins, they taught me the importance of sharing. Anything I owned was theirs, anything they owned was mine. So I guess I just saw their money as family money more than anything!
    I think that, more than anything, if you want your kids to be reasonable with money, you have to teach them to be reasonable in the first place. They must be taught compassion and sacrifice, even if not necessarily with money.

    I’m in college now and have taken over the family finances and am pretty much the family accountant. 🙂 I helped my parents pay off about $40k in over a year, with much more to go… and I never had to open up a lemonade stand to learn the value of a dollar!

    • Mariele says 14 February 2018 at 22:14

      I should add:
      -My parents weren’t the most responsible with money
      -I wasn’t expected to do chores, but my parents being disappointed when I didn’t do something was much more of a motivator to help out than simply being told to do something. So I always helped out! We just try to balance things out depending on who has the most free time.
      -I’m studying Accounting and considering getting a minor in Finance. I am money minded, and always have been!

  11. Simon says 25 March 2018 at 22:11

    Nice post. You get to the heart of it I think; it is no good trying to avoid the matter of money. I am thinking a lot about this as many parents are. Money is taboo in our society. Very touchy subject. At the same time as everything revolves around it.
    It seems that kids can handle everything if they are told about straight and simple. So I try do that. Money, the lack of it, myst not create anxiety and helplessness. So when my daughter asks why we are not living in a big house like her best friend I tell her that houses are much more expensive to maintain than you might think and I earn much less money than her friend’s parents. It hurts your pride. And you want to be a hero to your kids. But I think its better in the long run. I can do this now but I couldnt ten years ago.

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