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 SpoiledSome 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 a guest post 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!

More about...Psychology

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Dave @ Married with Money
Dave @ Married with Money
2 years ago

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)… Read more »

lmoot
lmoot
2 years ago

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… Read more »

Supermom
Supermom
2 years ago

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… Read more »

JoeHx
JoeHx
2 years ago

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… Read more »

S D Sullivan
S D Sullivan
2 years ago

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.… Read more »

Sequentialkady
Sequentialkady
2 years ago
Reply to  S D Sullivan

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
S D Sullivan
2 years ago
Reply to  Sequentialkady

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
Bethany D
2 years ago
Reply to  S D Sullivan

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.… Read more »

S.G.
S.G.
2 years ago

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… Read more »

Michael King
Michael King
2 years ago

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… Read more »

Matt Spillar @ Spills Spot
Matt Spillar @ Spills Spot
2 years ago

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… Read more »

BusyMom
BusyMom
2 years ago

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

Mariele
Mariele
2 years ago

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… Read more »

Mariele
Mariele
2 years ago
Reply to  Mariele

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!

Simon
Simon
2 years ago

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… Read more »

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