We want to be good role models for our kids by being financially responsible. As with most lessons – monkey see, monkey do. There is minimal financial education taught in school and thus it is important for parents to help teach their own kids how to manage finances. Teaching kids about money should start when they are young and be important ongoing lessons as they grow up.
I grew up learning about money by watching my parents. As a daughter of immigrants I watched how important it was to be frugal with money. My parents worked super hard at their labour jobs and they showed us how to live within our means. They stressed the importance of getting a good education of which will open doors to making good money.
As a young adult, I started to learn about personal finances on my own and it was difficult! There was a lot of self-learning and many money mistakes made. Now that I have my own family and reflecting on how much there is to learn about personal finance, I am going to start teaching my kids about money when they are young.
Disclaimer: I am not a financial planner or expert. All information in the post is based on my research, opinion and experiences. Any action you take based on the recommendations from this blog is at your discretion.
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Money Habits
Your money habits can be passed down to your kids. They will grow up watching how you manage your finances. The kids will see how hard you have worked for your money. They will also watch closely how you spend your money. In the day and age of just waving your card at the till money appears to be abundant. By teaching them how to be responsible with money will help them out for the rest of their lives. Money is interwoven into so many aspects of our lives, that these lessons are so important. Lead by example.
Here are my lesson plans on teaching kids about money:
Teaching kids about money: ages 3-5
It starts now. Start with the simple stuff. Explain what is money and why we need money. Show your child that to buy stuff at the store you need to exchange it with money. Talk about why parents have to go to work. This is a great age for their first piggy bank as it’s never too early to start saving money.
Teaching kids about money: ages 6-10
Wants vs. Needs
It’s a good time to discuss the difference between spending on wants vs. needs. Explain why you choose not to buy the toy they want (i.e. not a good deal, too expensive, or to save money for something that is more valuable). Show them that it’s okay to be frugal and explain where money can be better spent or has to be spent.
Lead-in to budgeting
When the kids receive money (allowance, gifts) – use jars/envelopes/buckets to allocate their monies for spending, saving and donating. Since our financial world is mostly digital, using a physical method to show how to save money makes the concept easier to grasp. This is a great lead into learning about budgeting – by showing how we can allocate money to be used for certain expenses.
Price comparisons
During a shopping trip to the grocery store, show the kids about the different prices for similar items. For example, take a walk through the candy aisle. Show them the sale items and regularly priced items. If they have $5, what can they buy with it? What can they choose to make the most of the $5? Or would they want to spend $5 on one good quality chocolate bar? Or perhaps they may want to spend $2 and save the rest.
Opening a savings account
Opening a savings account for your child will help them learn about money in the digital world to continue the lesson on saving money. You can explain to them what is “interest”. This would be a simple introduction to investing whereby you can use money to make more money.
The savings chart below shows a high percentage of men and women don’t have a lot of savings – which is quite alarming! Opening a savings account for a child is an important step to get them on the path to saving money as they grow up.
Teaching kids about money: ages 11-17
Ah yes the pre-teenage and teenage years. Let’s further build on the money concepts already learned. Money becomes more important during this age because they have more expenses and a preference for what they want to have and buy.
Explaining Budgets
This is a great time to share your family budget with your teenager. Explain the purpose of a budget (to make income = expenses and is a spending/savings guide) and why spending needs to be controlled and monitored. Ultimately, we want to be in control of our finances and not to go into consumer debt.
Related post: Budgeting 101
Saving Money
The saving money lesson continues. Now, it’s important for them to implement the lesson that if they have a “want” they need to save up money for it. This practice will set them up well for all the things they want to buy as they enter adulthood. Continue to stash money into their savings account.
Credit Cards
It’s time to introduce debt. Start with credit cards. Explain how they are used, why it’s important to pay off the balance each month and the danger of the high-interest rates on balances if not paid on time.
The Value of Hard Work and Getting a Good Education
Managing finances is one thing, but we also need to have a good income. Teach why it’s important to get a good education. Having a good education will open the doors to making good money. These are the important years to instill the good habits of working hard in school.
Teaching kids about money: ages 18+
There’s so much to learn during the young adult phase and the next lessons will be the most important ones. If they already have the basic money knowledge from prior years, these lessons will be easier. If not it’s never too late to start learning.
Most often young adults are set off on their own without the basic knowledge of how to manage personal finance. They have little knowledge of how to handle income from a real job, how to prepare for buying their own homes, how to invest and they don’t know anything about saving for retirement. Did you have a difficult time learning about some of these topics? (Or perhaps you are still struggling?)
At this age, it is easier to hand them a personal finance book to let the experts help out with the more advanced personal finance education. I highly recommend the following 2 books for any adults:
Wealthing Like Rabbits – by Robert R. Brown. The author teaches important finance concepts such as buying a new home and credit cards by using easy to understand stories.
I Will Teach You to be Rich (second edition) – by Ramit Sethi. Ramit gives a great introduction on how to manage money, debt and tactics on how to “be rich”.
Even though some of the money lessons below are reviewed in these 2 books, it would be helpful for you to discuss them with your child to elaborate and share your own experiences.
First Real Job
When your child receives his/her own first real paycheque – go through what all the numbers on the pay stub mean. Encourage them to enroll in the company’s pension plan and other retirement savings plan if available. Explain what they may get with the benefit plans and….what are TAXES.
Taxes
When your child is making money, it’s time to learn how to do their own taxes. For simple taxes, use a software program (i.e TurboTax) or there are free online tax programs. Learning to do one’s own taxes helps to understand how to minimize taxes through retirement savings contributions and what things are eligible for tax deductions and credits.
Have a budget
With actual income, it’s time for them to create their own budget! It’s important to stress to have an emergency fund and come up with money goals. Also talk about how to save money for large purchases such as a car, vacation and down payment for a home.
Related post: Best Budgeting Tips for the New Year
Buying a home
Both books offer great information about buying a home and about mortgages. Even though they may not be able to afford to buy a home at this age, it’s important to understand what is involved with purchasing a home. If they wish to buy a home in the future, they need to save up for a down payment and to buy a home that fits within their budget. In addition, they should understand all the costs involved with owning a home (lawyer fees, inspection, home maintenance, buying furniture, utilities, property taxes etc.)
Saving for Retirement
Yah… retirement. Even at this young age they need to understand that the earlier they start to save for retirement, it will be much easier for them to retire. Get a head start (and get into the habit) with saving for retirement as in the next several years they most likely will have many more expenses such as owning a home and starting a family.
Investing
This is a more advanced subject and may require extra resources for teaching. I recommend Kristy Shen’s “Quit Like a Millionaire”. Teach about the magic of compound interest as they have time on their side for investing.
The goal is to teach children valuable lessons on money before sending them out to live on their own. You want to set them up for financial success by learning how to save money, make smart spending choices and be able to navigate through life events such as getting married (having a wedding), buying a new home, be able to travel without going into debt and be able to pass on money lessons to their own kids. Give them lessons on good financial planning.
Teaching kids about money should start at a young age and continue until they are young adults. This will set them up to be financially responsible and to live an easier, effective and efficient life.
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These are such a great ideas! I really wish my parents had invested more into helping me understand these kinds of responsibilities that I would have as an adult. Luckily I finally figured it out, but it certainly wasn’t easy.