Money Mondays: How To Talk To Kids About Money

What can you tell us about helping our kids understand money?

April is Financial Literacy Month. You know how important financial literacy is to me, and there is no better place to start building a money-smart society than our children. It is remarkable how early kids begin to grasp financial concepts, so the earlier we instill responsible practices and concepts in them, the better off they will be when they are financially independent.

How are parents currently doing when it comes to talking about money with their kids?

 While the vast majority of parents want to teach their kids about money, many simply do not know how to go about it, and are therefore falling short. A survey of parents of children under 18 conducted by Ally Financial found that while 83 percent of the parents said that saving is one of the most important financial skills for children to learn, nearly 9 out of 10 parents admitted they did not talk to their kids about money on a regular basis. While nearly three-quarters encouraged their kids to save, under half said their child had their own savings account. And the disconnect continues from there.

You mentioned children start to understand money early. How early?

As you may know, I have a 3-year-old. Studies show by the time children are her age – just 3 years old – they understand basic money concepts, including that things have values, that we have to make choices, and the concepts of exchange. The good news is that we can start talking to our kids when they are very young.

However, bad habits can also develop early. By age 7, many behaviors that have to do with money, such as self-control – which we all know is very important when dealing with finances – or postponing gratification, begin to set in. But that is not to say that is the only time to teach your kids financial literacy. While they are under your roof, there are a number of things you can do to help make sure they are money smart.

Great. What are the key money concepts that our children need to learn early?

Getting past the taboo of talking about money is the first step. Just being open with your children about money, and not making it seem like a topic that is stressful or only for adults is important. Once you do talk to your kids, the most important concept for them to understand is that money is a finite resource. Many children are nearing middle school age before they realize that you cannot just stick a plastic card into an ATM and get cash back, or hand it to a store attendant to buy your groceries.

Which brings us to the second important concept: talking about how you get money. Explain where your money comes from. No parent likes to talk about how much you make, where you spend it, and how much you save, but it is a very important conversation to have with your kids. It will take money from an abstract concept to a real object that is earned.

Once we have covered the basics of money, what should we focus on next?

The next two concepts you want your kids to understand are savings, and opportunity cost. Both are tied to money being finite. If you have a young child, you want them to be able to differentiate between different pools of money: spending, and saving. Talk to your children about why you save – for emergencies, or saving for a future goal.

They should also understand that a dollar spent is one that can’t be saved, and that saving allows you to build your spending power for the future. If your child has an allowance, you can give them an extra dime for every dollar they decide to save rather than spend. As they save more, talk to them about how that will allow them to use their savings for bigger purchases in the future, that they cannot make now.

What if our kids are older? How do we teach them about money?

The best way to reach kids who are older is to work with them on a budget. Whether your kid has an allowance, or income from a job, sit down with them and help them understand their inflows and spending, and talk with them about their financial goals, whether it be saving for college or for a car.

Also, try to hold them to spending their money on things they want, rather than buying unnecessary or leisure items for them. And reward saving, if possible. Setting up a savings or investment account, and matching contributions to a certain point will promote longer term financial planning. And finally, review their financial statements with them each month so they understand their financial situation.

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