Teaching children money skills

If you aren’t teaching your kids about financial responsibility and money skills, you’ve left them vulnerable to a lifetime of financial insecurity.

Indeed, when it comes to money management success, exposure is everything.

According to a 2022 study by Brigham Young University, children who learn money management skills at home — like budgeting and saving — are more likely to carry those habits into adulthood. The research team also found that a solid foundation in financial literacy during childhood may have a positive impact on future romantic relationships, leading to more fulfilling relationships with significant others in young adulthood. (1)

Parents can help insulate their kids from some of the most common money management mistakes and build their children’s financial literacy by:

• Teaching them how to save and spend.

• Talking openly about the benefits of good financial decision-making.

“One of the most important things a parent can do is to have conversations about their financial decision-making at home,” said Nan Morrison, president and chief executive of the Council for Economic Education, in an interview.

To yield the biggest impact on kids’ money skills and habits, however, the lessons imparted must be age appropriate. Here’s a guide for how to teach your child financial responsibility as they grow.

Elementary school: Saving by example

Younger kids may not be ready for a lesson on compounded investment growth, but they can benefit greatly by watching their parents model good financial behavior.

“When you need new sheets and towels, explain that you’re waiting until January when the white sales happen and show them how much money you saved by doing that,” said Morrison. ”Make them realize that they can spend and save wisely. Let them learn by example.”

Be creative, too, using everyday experiences to complement traditional teaching. For example, families that celebrate Halloween can teach their children the concept of delayed gratification by establishing a schedule for how much candy they can have each day. Explain to them how much longer it will last if they pace themselves. As your kids swap candy with their siblings and friends, you can also drive home the concept of “market value.” A coveted chocolate bar may be worth three lollipops on the living room floor candy market exchange.

Also at this age, it’s important to demonstrate the value of money and sound money management.

That’s best done by giving them a dollar to purchase something at the mall, a yard sale, or at the movies. Let them see what they can get for a buck.

“Help them to understand that you cannot purchase something that costs more,” said Diane Pearson, a financial professional with Legend Financial Advisors near Pittsburgh, Pennsylvania, in an interview.

Elementary school kids can also begin to set financial goals.

When they receive birthday money from Grandma, or an allowance, encourage them to save the cash for something bigger that they really want.

Show them how to compare prices at the grocery store and explain how different brands cost more for the same product.

Tell them you don’t want to go out for dinner midweek because you would rather save that money for a nicer family meal this weekend, or that it costs the equivalent of four movie tickets, said Morrison. Money management is about making choices.

Middle school: Money management

As your children mature, you can start letting them experiment with the money they earn through babysitting, shoveling snow, or an allowance. Teach your children to save.

Help them set up three accounts — one for their savings, one for spending money, and one (if you choose) for charity. And explain how interest works, Pearson suggested.

These are the years to help children establish good saving and spending habits, and to help them learn to control impulse buying.

If your child commits a money misstep, let him or her fall, said Morrison. That’s kind of the point.

Don’t give them money for ice cream with their friends, for example, if they already blew their allowance on something they wanted less.

Back-to-school shopping is another opportunity to teach your kids money skills, including how to compare prices and distinguish between wants versus needs.

To help close the knowledge gap, continue to build financial literacy, and reinforce the lessons learned at home, look for activities or public events that help build money awareness.

For example, the MassMutual Foundation, in partnership with EVERFI, developed a program 10 years ago for middle school students called FutureSmartSM. Since then, FutureSmart has expanded to reach students’ families and educators. Educational modules for each audience are designed to convey the importance of savings, education, career choices, and the impact these have on future financial goals. FutureSmart is available in both English and Spanish, and to date has reached nearly 5.5 million students in the U.S. and Puerto Rico.

High school and college kids: Debt awareness

High school and college-age kids are ready for more sophisticated lessons in personal finance.

That includes debt. Many of the best and brightest graduates get themselves into financial hot water by spending money they don’t have and burying themselves in high interest credit card debt.

You can save your kids from a similar fate by explaining how interest rates work, and how those $300 designer sneakers cost much more if you pay with credit and make only the minimum monthly payments.

By paying $30 per month on a credit card that charges 18 percent interest, for example, that $300 would take 11 months to pay off and cost an additional $27 in interest, according to one credit card company’s calculator … and make sure your kids run the numbers themselves).

Video games, in some cases, can also potentially help to reinforce the principles of economics, including supply and demand, investing, and opportunity cost, especially those that simulate real-world scenarios.

Parents can also help their teens think beyond the purchase of their first car and develop a plan for staying debt free — especially as college kids near graduation.

“Help them to create a budget for future spending needs so they can understand how much of a salary they will need to cover those costs,” said Pearson.

Now is also the time to impress upon young adults the benefits of good financial choices — and the cost of poor decision-making.

Banks and other lenders rely on credit scores, a number that reflects your debt-to-income ratio and repayment history, to determine whether to issue borrowers a credit card or loans for a car or home mortgage. They also use it to determine what interest rate they should charge.

By making payments on time and keeping your debt to a minimum, consumers are far more likely to qualify for the most favorable, lowest interest loans.

Finally, there’s nothing like a lesson in compounded growth to motivate your adult children to save for their future.

A 30-year-old making $50,000, for example, who contributes 10 percent of her salary to a 401(k) would have amassed a total balance of $656,884 by the time she retired, assuming a hypothetical investment return of 7 percent pre-retirement. By waiting 10 more years to begin contributing, however, she would have amassed $289,375 by the time she retires, according to one retirement planning tool.

Conclusion

Teaching kids to save money has nothing to do with hedge funds and sophisticated investment products. At the end of the day, it’s merely about giving them the tools to become smart consumers, use debt wisely, and put money away for their future.

“You need to give kids a personal finance vocabulary so they have the confidence to ask the right questions,” said Morrison. “It’s very empowering for young people to understand that they can make good choices about money in their lives that can help their families and their futures.”

By:  Shelly Gigante

Shelly Gigante specializes in personal finance issues. Her work has appeared in a variety of publications and news websites.

(1) Brigham Young University, “Teaching kids about money pays off — in finances and relationships, BYU study shows,” Jan. 13, 2022.

This article was first published April 2016. It has been updated. The information provided is not written or intended as specific tax or legal advice. MassMutual, its subsidiaries, employees and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own and do not necessarily represent the views of Massachusetts Mutual Life Insurance Company.

Provided by Adam Johnstone, a financial representative with Cadence Financial Management, courtesy of Massachusetts Mutual Life Insurance Company (MassMutual).

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