What is one of the best ways to predict how successful a person will be in business?
The answer, according to numerous studies, is the age at which you learn about money. So the younger your children are when you teach them sound financial habits, the greater their opportunity to thrive economically as adults.
However, talking with your kids about money is not a “one and done” conversation. It takes a lot of time, honesty, and patience over many years. To get started, here are some basic age-appropriate tips.
Preschool (ages 3 to 6) - Introducing Money
Children develop their counting and math skills. They also become aware that money buys things – for example, while they accompany their parents to buy groceries or clothes.
And they see that some people have more or better things than others – such as their friends who may have cooler toys, bigger houses, or newer cars.
This is the time to introduce the concept of money, by teaching about four specific topics:
Earning – give children small amounts of money, for example, as a tooth fairy gift, as a prize for winning certain family games, or as a “bonus” for going above-and-beyond in their chores. Save the money in glass jars or clear plastic piggy banks, so children can see the money accumulating.
Teach kids the difference between bills and coins – for example, how 10 dimes have the same value as a single dollar bill. Counting money in different amounts is great practice for adding and subtracting – and as children get older, for division, multiplication, and percentages.
Saving – explain how and why certain things cost more than others, which means we have to save more if we want to buy more expensive things. It’s how children learn the relationship between how much they earn and how long they must save.
Spending – let kids purchase small items from their savings, such as a toy or a food treat. This enables them to practice decision-making skills and to understand how buying something means having less money in their piggy bank.
Giving – show them how they can give a part of their savings to help people who have less. It’s how charitable giving will become a natural, life-long habit.
Apps to consider for these ages include “DragonBox Numbers” and “Savings Spree.”
Grade School (ages 6 to 10) – How To Spend
Children start having a better understanding of the link between “cause” and “effect” – for example, how parents earn money; how money enables you to buy items; how different people spend money differently; and how smaller items, like shoes or cosmetics, only require one purchase while larger items, like a car, require multiple payments over time. They also see how some purchases are made without physical money, such as online or with a credit card.
Learning lessons during these ages include:
Goods versus services – sometimes money is spent on physical items, while other times we must buy the work effort of other people
Needs versus wants – explain the difference between things that are essential to live our lives (e.g. – food and shelter) and the things we want to make our life better or more fun or more comfortable (e.g. – games and vacations)
Short-term versus long-term goals – first show your child that if they spend on a favorite snack food today, they will have less saved to buy a special electronic device in a few months, then use your family budget to demonstrate how you must make similar decisions about postponing certain purchases now (such as going out to dinner less frequently) so you can afford a bigger purchase later (such as a new TV)
Make these ideas about money come to life and more real by asking children to accompany you to the grocery store. Set a budget in advance for your purchases, then have them select items that fill your family’s eating needs for the week while staying within the established dollar amount. Teach them how to stretch their budget by looking for items that are on sale.
Other teaching tools:
Have children keep a journal about the money they are putting into and taking out of their glass jar so they learn to keep records and track their financial habits
Select one specific family expense -- for example, the monthly electric bill -- and track it together for six months, monitoring how and why the bill varies from month to month, then come up with energy saving procedures around the house that can reduce the bill and benefit the overall family budget
A useful app for this age group is “iAllowance.”
Middle School & Early Teens (ages 11 to 15) – Consequences
Children are developing their ability to reason – to make more rational, less emotional decisions and to understand the consequences of making choices. They are more independent of their family, yet under more peer pressure.
So this is a good age to explain the financial opportunities as well as consequences of credit and debt. Teach them about interest and budgeting.
Explain that if you can’t afford to pay cash for something, you probably can’t afford it. But if you do use a credit card, you should pay the balance off in full each month. Use family bills and bank accounts to illustrate such concepts as electronic payments, borrowing responsibly, and switching money from one bank account to another.
Switch your children from glass jars by opening a checking and a savings account for them. Reinforce the lessons about paying off debts promptly by loaning them a small amount of money – for example, to buy a musical instrument or a summer pass to the local amusement park. And be sure to charge a reasonable interest rate.
Children will learn that they can get what they want now – but they have to pay it back over time. It’s an important lesson for them, although perhaps a frustrating one.
Valuable apps include “Bankaroo,” “Beat the Thief,” and “Acorns,” along with appropriate apps offered by your bank. Expand their understanding of our cashless society with apps such as “PayPal” and “Venmo.”
Late Teens (ages 16 to 18) – Preparing For The World
These are the prime years for your children to practice the financial basics that you have taught them earlier in their lives. Typically, they are working more and earning more. You are guiding them to fully understand and appreciate such concepts as:
- the process of saving and paying for college expenses
- the link between money and hard work
- the value of delayed gratification versus impulse shopping
- the role of credit scores, identity theft, and taxes
- the difference between good debt (student loans, mortgages, car payments) versus bad debt (credit cards, payday loans)
According to PC Magazine, the best personal finance software is “Mint” – which is easy to set-up and offers a flexible yet thorough view of your finances. It’s a valuable tool for people of all ages to identify both spending trends and areas for improvement.
Teaching your kids about money will be hard for you, especially because you’ll watch them go through a process of trial-and-error. Inevitably, they will make mistakes – they will spend money unwisely and they may even lose money.
Give your children the freedom to make mistakes and to learn. They will develop competence and confidence. And making a $20 or a $200 mistake as a young person is much better than making a $20,000 mistake as an adult!
Navin Shah is Chairman of Royal Hotel Investments, which owns and operates two hotels in Covington and one in Conyers. He is also Vice Chairman of Embassy National Bank, a community bank in Lawrenceville that he helped establish in 2007. He can be reached by e-mail at firstname.lastname@example.org