Nearly 40% of parents are hesitant to talk with their kids about money, but home is one of the best places to teach financial planning. Showing kids how to save, budget, spend, and invest can help set them up for success in the future. Here, we’ll give some suggestions on how to discuss money management with your kids, based on their age group.
Preschool and Kindergarten: Budgeting Basics
- Give them a visual. Instead of a piggy bank, save money with a clear jar (or plastic container, if you’re concerned about glass). Kids will be able to see their savings build up in real-time.
- Talk about needs and wants. Explain that things like housing, food, clothes, and education are needs, but toys, sweet treats, and gadgets are wants. You can even try quizzing them on objects around the house. This will help kids understand that, sometimes, you need to set aside money for future needs instead of buying something you want.
- Think out loud. Talk about your own needs and wants, and reason out loud your decision on saving or spending: “I really want a new pair of shoes, but the ones I have are still good, and we need to save for our emergency fund. Since I don’t need new shoes right now, I’ll wait to buy new ones until later when we have enough money to save and spend.”
Grade School and Middle School: Financial Planning 101
- Have them earn their money. Instead of an allowance, have kids earn money and learn the value of their hard work. One survey found that 82% of kids in the U.S. earn their money through getting good grades, completing household chores, and doing their homework.
- Talk about budgeting. When grocery shopping or buying school clothes, set aside a certain amount for “wants” as well as needs. Then, help your child reason out which “wants” they can afford: “You’ve got $30 to spend on wants, and those shoes cost $25. If you buy these, you’ll only have $5 left to spend.” Then let them make their decision. This will help them reason out budgeting and show them they can control their spending.
- Give them a savings goal. It can be difficult for kids to understand saving for savings’ sake, so give them a goal to work toward. Whether it’s a specific purchase, or a reward for reaching a certain amount, giving them incentives for saving can help them learn the habit.
- Set up matching contributions. If you have room in your budget, you can even set up a contribution to your child’s savings, like companies with an employee 401(k). You can even use this as an opportunity to learn about interest rates: “You saved $100 with a 10% interest rate, so now I’ll add $10.
- Open a savings account. As kids get older, you can move away from their savings jar and help them open a savings account. This can help them set up a foundation for their savings in the future, and you can make going to the bank an event.
High School and Older: A Solid Foundation
- Talk through major purchases. If, for example, your child wants to buy a car, explain the process to them: “You won’t buy the car, you’ll ask the bank to buy it, and then you pay back the bank every month to keep the car. The bank will also charge interest, which means they’ll ask for extra money.” You can also do this if your family is making a large purchase. Discuss high vs. low interest rates, how bigger purchases can build credit, and the importance of paying your bill on time.
- Explain taxes. Teach kids how W4s show how much money is taken out of their (or your) paycheck, and explain the difference between gross and net pay. Show kids how to do their taxes so they aren’t blindsided by their first filing.
- Lend instead of give. If your child needs to borrow money for a purchase, have them pay you back with interest. This will help them understand interest rates.
- Use brands to buy stocks. CNBC suggests using kids’ knowledge of brands to introduce them to stock investing. Help them look up their favorite companies to see if they’re public, then show them how buying stocks can help them save or earn more money.
- Talk about credit cards. Whether they have one or not, make sure they understand the concept of credit, buying now vs. paying later, and compounding interest.
Reach out to an associate today for assistance with financial planning.