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5 Simple Steps To Teaching Kids About Money

Steve Pomeranz, Teaching Kids About Money

Healthy money habits to teach your kids

It’s never too early to start teaching your children healthy habits and that includes financial ones. From an early age, children begin to observe their parents in all areas of life, including their spending and saving and how they talk about money. Kids pick up on our attitudes about money just by watching us. So grab this opportunity to inculcate healthy financial habits at a young age and help your kids become financially wise adults. Teaching kids about money is probably not as hard as you think, for them or for you—just use your everyday experiences with them to instill financial awareness. The first two money habits I plan to talk about can apply to very young children, while the last three are probably best with children aged 8 and up.

  1. Model good financial behavior

Children watch their parents and replicate many of their habits. So take a second and think about your “money behavior” when your children are around and reflect on what you think they may be learning from you about money.

Are you mindful of your spending around your children? Are you and your partner always getting the newest gadgets, cars, or items for the house? Do you eat out a lot as a family? If you’ve answered yes to one or both of those questions, your children are likely to develop an “I want it, I can have it” financial attitude, which could lead to some pretty painful financial mistakes, mistakes like racking up heavy credit card bills to satisfy their need for instant gratification.  Clearly, this is the wrong approach—misleading by example, you might say—to teaching kids about money.  Instead, practice shopping on a budget, using coupons at the grocery store, and making home-cooked meals early on. Even if your children are young, they notice these things and will learn to value money. In fact, I, for one, am a big fan of value-for-money in a lot of my purchasing and spending decisions, such as, for example, buying high quality food even at a higher cost and cooking nutritious meals at home instead of going out for less healthy and more expensive dining options.

  1. Make them wait to buy things they want

Learning how to delay gratification is a much-needed skill in today’s “have it now” society. Teach your children that when they go to the store with you, they don’t always get to leave with something. If they can’t stop talking about that new toy they want, tell them they can ask for it for their birthday or Christmas or let them earn money by helping out with chores around the house.

Through this, kids will learn “discipline with spending”, and that they don’t always get to buy something when they want it. Once they start bringing home their own paychecks, this delayed gratification will help them stretch their paychecks through the month.

The two points I just spoke about are money habits you should start practicing from the day your child is born. The next three are perhaps better saved until your kids are about eight years old and have a clearer sense of the world around them.

  1. Kids savings accounts: teach them to save for the long-term

Kids savings accounts are a smart way to get them involved with managing money at a young age.  One of the best approaches to teaching kids about money and saving is with the “rule of thirds.” When your children get an allowance or money for their birthday, have them put one-third into a long-term savings account like a 529 college savings account and one-third into a savings account for a bigger purchase like a bike or an iPhone—something expensive that they really want. For the final third, give them the option of doing what they wish with it; let them spend it immediately if they want or let them, of their own volition, stash part of the last third into additional savings.

Moreover, to reinforce this and to introduce them to day-to-day financial transactions, take them to the bank with you and make them deposit their money so they feel responsible for it. Show them their online bank or savings statements each month and tell them how their money is growing with interest. You can also help them set goals for larger items they may want to save for, such as a new bike or a trip to Disneyland.

  1. Teach them how to compare price, features, and quality

Take your children shopping and compare prices with them on the items you buy, so they can see the value in what you buy. For example, show them two shirts at different prices and explain why they’re priced differently—maybe it’s the material, maybe it’s on sale, or perhaps brand name vs non-brand. Take them to the grocery store and show them how the same food item can have two different prices, and let them help you decide which one to buy.

When you go shopping for “back to school” items, make them set a budget and prioritize their needs and wants, with wants coming in below their “needs.” Also, show them how comparison shopping can really save money so that these habits get ingrained and become automatic as they get older. Teach them how to read labels, show them how to look at things like ingredients, price per pound, the savings with generics versus brands, etc.

  1. Let them make decisions and learn from their mistakes

If your child saves up enough money for something you think he’ll regret buying later, let him buy it anyway.  Teaching kids about money doesn’t always have to be based on positive reinforcement.   Kids will remember spending their savings on a toy they used only a few times and may make different choices in the future because of that painful lesson. It’s better for them to make mistakes and learn now, rather than when they’re older and the consequences are much greater.

Help your kids develop a solid financial foundation and impress upon them healthy money habits through example to help ensure that they become financially responsible adults. With simple examples, talk to them about the benefits of saving, the power of compounding, and the advantage of paying off credit card bills in full in each monthly billing cycle.

Giving them these building blocks early on will allow you to reinforce increasingly complex and important lessons as they grow. Remember, as a parent, helping your kids build healthy money habits is one of the best things you can do for them.

I've been an investment strategist and adviser for over 35 years, leading with a mission of unbiased advice to educate and protect listeners on my weekly radio show on NPR affiliates nationwide. I have been named a “Top 100 Wealth Advisor” by Worth Magazine and “Top Advisor” by Reuters.