How Do I Teach My Kids About Money?My oldest little philosopher is 7 years old. She recently became interested in how money works. One day, she started asking about where money comes from, how we spend it, and how much things cost. Soon after that, my little girl and I were riding in the car listening to an awesome podcast on the Financial Residency (a great podcast for the readers of this site). Ryan Inman runs the show and the guest was Andy from the Marriage, Kids, and Money podcast. As she listened to money being discussed she said, “Daddy, will you teach me about money?” I tried to contain my joy since this is something I’ve looked forward to teaching my kids for a while. Maybe this was finally the time? Why would I be excited to teach my kids about money? Two very specific reasons. 1) I want my kids to learn how to be a good steward with the money they are given 2) Our consumerism culture makes making idolatry of money a very easy thing to do. So, I want to teach them about money while not letting money itself become an idol (more on this below). So, read on if you’ve ever asked, “How do I teach my kids about money?” Here are ten money lessons you could consider using.
How to Teach Your Kids About Money: 10 Money LessonsThis wouldn’t be a very good post if I left it at “teach your kids about money when they start to become interested.” Let’s dig in to the practical principles.
Lesson Number 1: Contentment FirstWhen I first started giving my little girl a weekly paycheck (more on this below), she felt the money in her hand and this is the first thing that popped into her mind, “I want to buy something with this.” And by “something,” she meant the first thing that caught her eye in the store that day – a $1.47 pack of gum. After she made a few purchases like this, we started discussing the most important conversation around money: the real secret to financial success. Money is a tool that allows us to have the ultimate commodity, which is time. Time to be spent living a meaningful life, however we define that. So, the most important lesson to start teaching our children early and often is that spending money provides fleeting happiness and that the candy, toy, or 61st stuffed animal will not likely provide long lasting happiness. Instead, we should teach them early and often to be content with what they have and to show them how and why money is important as a tool to buy time. But first, we must teach them that spending is not a cure all for happiness. A lesson that honestly most adults need to learn, too. So, before we do anything else, first teach your child that consumerism and spending is not the answer to happiness in life. Teach them contentment, first.
Lesson Number 2: The Giving Fund (1st Fund)My daughter (7 years old) gets paid $5 per week. We have discussed with her that as her responsibilities grow, she will be encouraged to negotiate for a raise. Given that she knows nothing about money, we have set things up to value what we value. So, her $5 gets split into three funds. First, we encourage our daughter to tithe the first dollar she is given each Sunday. We encourage our daughter to give money away for a variety of reasons, chief among which is to recognize where her wealth comes from. Also, we feel that her learning to give money away might prevent it from becoming an idol in her life, despite it being something that we talk about regularly. So, our first two goals when it comes to money are teaching contentment and generosity. I am a Philosopher after all.
Lesson Number 3: The Savings Fund (2nd Fund)The second dollar (20% of her take home pay) gets placed into her savings fund, which is a physical glass mason jar that sits in The Parental Bank of Dad in our bedroom. If you are reading this website, I likely do not need to go into the importance of saving money early in life. That said, my seven year old knows nothing about saving money. This is a learned behavior. So, through this three fund model she now understands that giving to others is the most important thing to do with her money, followed by saving her money. In fact, I think saving is so important that I’ve encouraged her to have two different kinds of savings…
Lesson Number 4: The Discretionary Spending Fund (3rd Fund)The third and final fund is her discretionary spending fund. While the first two funds are non-negotiable – until she is old enough to have a conversation and form her own beliefs – the third fund is where she gets to use her discretion. This discretionary spending fund is where I encourage my daughter to make smart choices – and teach her about behavioral finance. She can choose to spend the money or place it into her secondary long-term discretionary fund (a piggy bank) to save for something else later that she really wants. We have been paying my little girl for about four weeks. In her fourth week, it was the first time she went into a store with money in her pocket and decided to save the money for next week, instead of spending it. MAN, that made me proud. And I was sure to tell her! We will make a saver out of her yet. The next step is to get her to contribute money each week to her long-term discretionary fund.
Lesson Number 5: Encouraging SavingLet’s be honest, adults are just big kids with a little more well developed thalamus and frontal cortex (most of the time). Theoretically, this means it should be easier for us to make decisions, though I sometimes doubt that. That said, adults need to be encouraged to put money into their savings accounts. That’s why mandatory contributions and employer matching exist at most employed positions. In fact, studies have shown that people are more likely to voluntarily contribute to their 401K when their employer has a mandatory contribution. For this reason, I offer my daughter the Daddy Match. Every dollar she saves will be doubled at the end of the month. So, when she puts away $4-$5 each month, it will automatically turn into $8-$10 at the end of the month. This helps teach them two things: you are rewarded for doing the right thing with your money and when you put your money away it has a chance to grow. When she gets older, we will put the money into the market and teach her about compound interest. (She is working on addition and subtraction right now…so, not quite to percentages, yet.)
Lesson Number 6: Make Money RealSpending with plastic credit cards (which my wife and I do with every purchase to get points or cash back) does not teach a kid anything other than that money is an imaginary thing that’s always there when you need it. When we want something, we simply buy it. This is obviously not a great money lesson. For this reason, one of the most important things to teach your child about money is that it is real. We do this in two ways. First, with everything discussed on this page, we use physical dollars and coins. My little girl places the dollar into the tithing basket as it passes. She places the physical dollar in a real mason jar for her Daddy Match savings account. The second way that we let our kids interact with money is by shopping with us. “Hey, honey, can you go and find the peanut butter. And can you find the one that has the best price?” When she comes back, I ask her how much it costs. This has taught her that everything has a value and it puts her discretionary spending account into perspective. “Daddy, I can’t even buy a gallon of milk with my money!”
Lesson 7: Make Money Struggles RealWithout turning this into a parenting blog, I’ll tell you that many people in public ask how all three of our kids are so well behaved. I usually tell them two things: consistency and boundaries (and a dash of good fortune). All of my kids know that when I tell them there will be a consequence (or a reward) if they do something wrong (or right), they can rest assured that whatever I have promised will occur 100% of the time if they make that choice we discussed. Without fail. For example, if I tell my daughter, “If you put your hands on your brother again – instead of using your words – you will be sent to timeout. Do you understand?” I have defined the boundary (not using our hands as a means to express our anger) and the result if the boundary is crossed. The consistency comes in my kids knowing that the consequence (time out) will absolutely occur if they cross the boundary. Tough money lessons should be no different. When my daughter wants something that isn’t a need (and it isn’t her birthday, Christmas, or a random act of love from us), I ask her if she has saved the money to buy that “want”. When she says that she hasn’t saved enough because she has spent all of her money every week on chewing gum, I inform her that what that means is that she cannot afford what she wants. That’s the end of the conversation and she now knows that if she wants something, she must save up for it, and that daddy isn’t going to bail her out (unless she utilizes some super impressive negotiation skills that she hasn’t developed yet).
Lesson 8: Goal Setting and Delayed GratificationAbove, I briefly mentioned my daughter has two savings accounts. The first is a traditional account that shouldn’t get touched. The second is her long term discretionary savings account (the piggy bank). To give her a head start, we’ve placed money in that for a while. She has a little more than $30 built up inside that ceramic pig. However, in order to access that money she has to do two very specific things:
- She has to detail how she wants to use the money (buying a scooter, a new board game, etc).
- She must wait two weeks after the decision to use the money.
Lesson 9: Using CreditThis was briefly discussed above, but it is important to us that our kids understand what it feels like to be able to afford something and what it feels like when you can’t. I do not want my children thinking there is a third option: buying things on credit when you cannot afford them. For this reason, when they don’t have enough immediate money they have two choices. Define their goal and wait the two weeks to use the long term discretionary savings fund (Piggy Bank), or saving up the money in their wallet. The bank of Dad does not work on IOU’s or provide credit (except on birthdays, Christmas, and with random acts of kindness unrelated to a child being unable to afford something). We should want our children to understand the merit of hard work, saving, and spending money intentionally. Buying things on credit does none of that.
Lesson 10: Avoiding IdolatryIf you’ve made it this far into this post (now over 2,000 words) I want to provide you the most important money lesson to teach our kids. Money is not the end all be all. Reading that, this may seem self evident, but the truth is that in our culture money has become an idol. It’s really important to teach that while money is important, it is just a tool. Yes, money makes things easier. But money won’t and can’t ever provide real satisfaction or happiness. In fact, multiple studies have shown that there is a baseline salary ($75,000 – $125,000 depending on where you live) above which happiness does not increase. Teach your kids about money. Make good money principles apparent to them. But never confuse them with money being the end all be all. It is a tool meant to help design the life we want to live. This should bring us all the way back to the beginning of this post. Lessons 1-4 taught us about contentment, intentional spending, and the three funds. Those three funds are in a very specific order for a reason: Giving, saving, and spending. Give first to prevent this idolatry. Save second to teach them patience and humility. Then, they can spend some money on things they want. Keep priorities straight!
Take HomeHopefully, some of the above lessons and ideas will be helpful in teaching your kids about money. I am by no means an expert in this area, but this is what we have done and it seems to be working quite well for us. How do I teach my kids about money? The same way you should handle yours! Very intentionally.
If you have other ideas on how to teach kids about money, leave it in the comments. This list could certainly be longer than just ten lessons. Happy to add to the list!TPP
Well thought out post and it is awesome that your 7 year old already approached you about finance topics.
I have had discussions on finance with my daughter (now 12) particularly on the 20 min ride to drop her off to school. First thing that I told her was that you should not be fooled by appearances. There are people that may appear wealthy but are not thanks to being in heavy debt to fund their lifestyle.
I like your idea of the daddy match. Those are some pretty good interest rates, would you consider opening it up to non-family investors? LOL
I have also stressed the idea of passive income and discussed real estate and how it works. She definitely sees the rewards of what I have done and appears to be interested.
Haha yeah the daddy match is pretty strong. Strictly family members at this point, though 🙂
Passive Income teaching will come soon enough, my friend!
Great post. I got some time for this but it’s good to think about. I was listening to a pdocast, i think it was the good dad project interview on choose FI and the guy was saying how he gives his kids a $100 monthly allowance but that they are responsible for nearly all discretionary spending on their behalf. The kids have to pay for hair cuts, snacks, clothes etc.
The parents are spending the same amount ($100 allowance vs spending that $100 anyway on the kids) but this gives the 10 to 12 yr olds some autonomy and practice with much of what you talked about. I thought it was genius.
I am not a huge fan of allowances because (in my mind) it just produces entitlement that they come to expect given money because they exist. I want it to be very closely linked to work so that they realize if they provide a service they will be rewarded for it.
I do like the idea of paying them enough to deal with all of their discretionary expenses, though
I’ve got a bit of time before I need to really think about this (he just turned 1) but I think about this a lot. I grew up lower middle class and remembering envious of my wealthier peers and wanting luxury goods. We never talked about money at home.
I had the same problem growing up. My parents never discussed money and purchased everything with credit cards.
Goodness! This is brilliant! We did ok as parents, but if I could do it over I would copy your approach. (Also, tip of the hat: you are a very fine writer! I’m subscribing for more.)
Thanks, Rick! I appreciate your kind words. I had a conversation today with my two oldest kids about a rug we purchased after saving so that they would understand we waited six months to buy the rug. My oldest said, “you waited to buy it just like I waited to buy my rabbit after I saved enough money!”
It was nice to see the teaching being validated.
Very nice article. I m already doing few things that you discuss to teach finance to my 8 and 40 year old. Looking forward to incorporate few more of your suggestions.
Awesome! Which parts do you plan to put into practice?
I just realized I wrote 8 and 40 year old. It’s actually 8 and 10 year old. I give them $ 3-5/ week based on how helpful they have been throughput the week. But it goes in a single pot. I like the idea of dividing into savings, spending and giving pot. I am also going to try ‘Daddy match’.