We all want the little ones in our lives to grow up to live satisfying, successful, and happy lives.
There are many important things that we can pass down to the children in our lives. Money skills are vital to teach, yet this is one topic that is sometimes overlooked when raising children.
In our modern society, money plays a huge role in our lives. Unfortunately, personal finance is not sufficiently addressed in most school systems.
It’s on us — parents, friends, and loved ones — to teach the next generation about the principles of personal finance.
Teaching kids about money doesn’t need to be complicated. This comprehensive guide will cover everything you need to know to start talking about money with the children in your life.
The Importance of Financial Literacy
Financial literacy is the basic knowledge required to understand money and to make informed financial decisions. It is a blanket term that can refer to everything from how a checking account works to the benefits of investing.
Someone who is financially literate will have a better chance of financial success in life. They will be more likely to avoid common financial pitfalls, like excessive debt, and they will have better odds of reaching their financial goals and living a successful life.
Financial literacy is important for everyone — and it’s more important for children than many people realize. In fact, a psychology study at Purdue University found that many money habits are established by age 7.
That means that parents and loved ones have a limited window of time to impart financial wisdom and instill good habits.
And because personal finance skills are not taught in most schools, it really is left up to parents and loved ones to teach kids about money.
The same Purdue study also found that kids can begin to understand basic money concepts as early as 3 years old. It’s never too early to start with the basics of money — and according to the latest science, ages 3-7 is the prime time for introducing children to money basics.
For children who are older than 7, there’s still time! The point here is that the earlier you start, the better.
Teaching Kids About Money
So, how do you go about teaching kids about money?
The answer depends on how old the child is, their personality, and the concepts you are hoping to teach.
It’s wise to choose age-appropriate topics to teach. Here’s a breakdown of what concepts to teach by age group.
Very young children: Counting skills, the basics of money as a concept, etc. A good approach is to use game-based learning.
Playing “grocery store” or “farmer’s market” with the child exchanging play money for play goods is a great place to start.
Middle-schoolers: Providing an allowance, making real-life purchases, and introducing concepts such as saving for major purchases.
Now is the time to get real money involved and encourage the child to make real purchases with that money. Providing an allowance or paying the child to do chores is beneficial at this age. This is also a good time to introduce the concept of investing and/or saving to earn interest.
High-schoolers: Providing more financial autonomy, introducing concepts like debt, credit, and financial planning, etc.
In high school, teens should be given more autonomy financially. Teens want to feel independent from their parents — it’s helpful to explain how money can provide more freedom, both now and later in life.
It’s a good time to set up a bank account, get a debit card, and encourage them to get a part-time job or side-hustle. It’s also time to introduce more complex concepts like debt, credit scores, and financial planning.
Note: Each child is different, and there are no firm rules about when you should teach certain concepts. These are simply basic guidelines to keep in mind.
Key Money Concepts to Teach
Now we know when to start teaching kids about money — but what are the concepts we should actually be discussing?
Money is a broad concept, and there’s a lot to learn about. Parents and loved ones should start with the basics while teaching personal finance to children.
The power of money
Money has the power to provide freedom, flexibility, security, and confidence. As a broad concept, this is one of the most important things for children to understand.
This concept can be taught in an age-appropriate manner. For young children, explaining that money can buy the things and experiences they want is a good starting point.
For older children, explaining that money can provide autonomy and freedom will be more impactful. For teens, explaining that money can allow them to venture out on their own (and no longer live with their parents!) will be the most relevant.
Saving vs. spending
There are essentially two things that you can do with money:
- Spend it
- Save it (or invest it — more on this later)
Children will typically want to spend the money they get on short-term rewards, like candy or new toys. It’s important to introduce the concept of saving money early.
You can start with a piggy bank before eventually opening up a real savings account (or even multiple savings accounts for different savings goals). Encourage children to save a certain percentage of any money they earn.
It’s helpful to have a goal in mind. Perhaps the child can buy a new bike once they save $100 — if the bike costs more, offer to cover the rest when they hit their savings goal.
The concept of “saving for the future” can be difficult to grasp for children. It’s helpful for adults to sweeten the deal by providing “interest” or some other form of reward for saving.
Effort & reward
Teaching work ethic is important for far more than just money — but it’s a very relevant topic in personal finance, as well.
The goal should be to teach children that if they work hard, they will find success in life. From a financial perspective, that could mean paying them to do chores, giving them a financial bonus if they earn certain grades, or finding other ways to reward their efforts.
Money decisions require careful planning and consideration. While children likely don’t need a formal budget, it’s still important to introduce the concept.
Parents could also teach budgeting skills by giving their children more autonomy with money. For example, each Monday, you could provide them with enough money for school lunches for the entire week and allow them to purchase what they want (with the knowledge that they only have $XX for the entire week).
Each purchase or money decision we make comes with pros and cons.
If we buy an ice cream cone for $4, we get to enjoy that ice cream cone — but now we no longer have that $4. What else could we have used that $4 for?
This concept is intertwined with the spending vs. saving lesson. It’s often helpful to meet children in the middle — by buying a $3 scoop without a cone and saving the $1 for something else, for example.
Investing is simply buying assets with the purpose of growing your money over time. Those assets could be stocks, real estate, bonds, etc.
Investing early can have profound effects. For example, if you invest just $10 per week from age 10 to age 65, you’d have more than $940,000 at retirement age (assuming 10% average returns — the long-term average stock market return).
If you start at birth and continue the $10/week investment strategy, the child would end up with over $2.4 million at age 65.
This is due to compounding interest. As the profits from your investments start to earn profits themselves, growth accelerates faster and faster. Learn more in our stock market for kids guide.
Want to get started with an investment account for children? EarlyBird is the simplest way to get started.
EarlyBird allows adults to set up custodial investment accounts for children and get started with investing in diversified portfolios of investments. Once set up, anyone can contribute financial gifts to an EarlyBird account. And when the child becomes a legal adult, they will gain full control of the account and the money inside it.
How to Teach Kids About Money
The concepts above are the most important to cover. But how can we actually go about teaching children about money?
1. Lead by example
Children absorb life lessons and habits from the people they spend time with.
This applies to everything from social behavior to money skills. Therefore, it’s important to demonstrate good personal finance habits in front of the children in your life.
It’s also great to talk openly about finances. Simply putting an optional purchase back on the shelf — and explaining to the child that you’ve weighed the pros and cons and decided to save the money instead — can teach profound lessons.
2. Provide an allowance
Children need practice to master real-life money skills. Providing an allowance is a great starting point.
When children are given their own money, they can start making their own decisions with that money. Loved ones can provide gentle guidance and advice, but it’s often best to allow children to make their own financial decisions — and to understand the tradeoffs of each decision they make.
3. Give them responsibility
As children get older, they should be given more and more responsibility and autonomy. This applies to personal finance, as well.
For younger children, this could be managing their allowance money. For older children, this could mean asking them to pay for their own cell phone bill or encouraging them to seek part-time work.
4. Let them make mistakes
We learn from our mistakes. In many cases, making relatively minor financial mistakes early on in life can save us from making much bigger mistakes as adults.
Parents and loved ones should provide gentle guidance to children but shouldn’t try to stop them completely from making their own mistakes. For example, if a child spends some of their savings, they might not be able to buy the item they had been saving up for. This could be a great learning opportunity for them that motivates them to save more diligently in the future.
5. Involve them in household finances
It’s wise to show children that money plays a role in everyone's life, including in your household. Involving children in household finances in simple ways can help financial concepts sink in more.
For example, you could ask the child to make the purchase transaction when you’re buying groceries. Or you could involve them in financial decision-making conversations.
6. Plant seeds — and help them grow
For parents and loved ones of young children, the key idea is to plant seeds, water them… and step back to watch them grow.
In other words, children need space to learn firsthand. You can teach them conceptually, but they need real-life experience in order for key personal finance concepts to actually sink in.
If you can, try to create an environment where children feel that they can ask you questions or come to you with problems. Then, step back and let them do their thing — they will learn by doing, as children tend to do!
In adulthood, money skills are vital for security, stability, and success. The earlier we can teach these skills to children, the better prepared they will be for adulthood.
Teaching kids about money doesn’t need to be complicated — but the best strategy will differ for different age groups and personalities.
One powerful way to teach about investing is to open an EarlyBird account. EarlyBird allows parents and loved ones to contribute money to a child’s investment account. Children can then watch their savings grow — and benefit from the magic of compounding interest.
This page contains general information and does not contain financial advice. All investments involve risk. Any hypothetical performance shown is for illustrative purposes only. Actual investment performance may be different for many reasons, including, but not limited to, market fluctuations, time horizon, taxes, and fees. Please consult a qualified financial advisor and/or tax professional for investment guidance.