(GCC: I recently asked Chief Mom Officer a very pointed question:
Winnie and I both grew up poor, and a big part of our money value system started from a place of deprivation. We ended up in the right place, but not in necessarily the healthiest way possible. Now we are raising our own family with an abundance of money and time… how to instill those same values about saving, delayed gratification, etc… in a positive and healthy way?
What recommendations would you make to families like ours?
Today’s post is the answer.)
How do you teach kids the important lessons about money, especially if you didn’t grow up with a great parental example?
Teaching your children important money lessons can be tricky. I would know. As the mother of three boys, ranging in age from 14 down to 3, I’ve had a lot of experience with teaching kids of different ages the basics of smart money management.
Hi all, I’m Liz and I write over at Chief Mom Officer helping people with money (theirs and their kids), work, and frugal family life all with the goal of reaching financial freedom. When Jeremy reached out to ask me to share tips on positive and healthy ways to teach your kids about money, I was very excited. This is one of my favorite topics – so much so that I have an entire page on my site dedicated to the topic!
The Two Key Parts to Money
There are two key parts to money that are both important to teach your kids:
- The Practical, Physical, Mathematical – What is money, how does it work, how do you invest it, what is compound interest – these are all examples of practical money information you want to pass down
- The Intangible – These are the skills your kids will need to navigate the world of wise spending, saving, and investing successfully. Skills like delayed gratification, value of money, goal setting, not being spoiled, and how to make wise purchasing decisions are key here.
Teaching intangible money skills to your children can be much trickier than the practical ones, at least in my experience. Why? Because most parents don’t think about it, and so impart those values to their children through their actions, rather than on purpose.
Since you’re here reading a site about financial freedom and traveling the world, if you have children, I assume you’re also interested in helping them achieve “second generation FI”. So how do you do that?
How to Teach Your Kids
Sitting down your children and lecturing them on the virtues of delayed gratification or how compound interest works is likely to get a glazed look. They’ll tune you right out and start thinking about dinosaurs, that TV show they want to watch, or the video game they want to get back to.
So how do you teach your kids in ways that make them sit up and pay attention? You make it:
- Age Appropriate
- Part of everyday life
I’ve found the best way is to simply make money part of your conversations at home. Answer their questions, discuss purchases, and share age-appropriate information about budgeting and investing.
Let’s take a closer look at how this might work with the two key kinds of skills.
The Practical, Physical, Mathematical Skills
Teaching practical money skills is important, because you can’t rely on schools to do so. Your kids will likely learn what money is and how much each bill and coin are worth in elementary school.
They may or may not get some kind of personal finance education in high school, depending on where you live. My experience is that my oldest son just wrapped up his freshman year and there was zero about personal finance so far.
When your kids are two and under, you teach them the most important money lesson of all. Don’t eat the money.
After that, you can start teaching them to count, and part of that can be counting money. Up through early elementary age, kids mostly focus on learning the different bills and coins.
Once they’ve mastered that, you progress to teaching them about simple and compound interest. I’ve found this video of a penny doubling every day is a good starting point to the wonders of compound interest.
Watch the video and pause at 32 seconds to find out whether your kids would choose to be paid a penny doubled every day for a month, or a million dollars. They’ll almost certainly pick the million dollars and be amazed at the real response. The video also covers simple vs. compound interest.
Another great resource my older boys enjoyed in elementary school was watching the Secret Millionaires Club videos. Warren Buffett himself stars in this series about a group of kids, covering money lessons from running a business to the cost of brand loyalty. My boys found them so much fun we watched them all in one sitting.
Before your kids finish high school, you’ll want to make sure you’ve schooled them on the basics of budgeting, saving and investing, emergency funds, retirement accounts, and the like. Since my oldest son is in high school now, we go through some of the investment statements so he can learn to read and understand them. Once he gets a job we’ll go through budgeting, saving, and retirement accounts.
And if paying for college is a goal of yours (totally fine if not) get your middle and high schooler involved in the process of saving and investing for it. Not only will they be clear on just what you will and won’t pay for, but it’s a great learning opportunity for them.
What about the intangible money lessons – concepts like delayed gratification, goal setting, discipline, and wise spending?
Intangible lessons can be trickier to teach to your kids than the practical ones. And I would argue that these just might be the more important lessons to learn. The method I use, which seems to work very well, is using everyday events and conversations to help my kids come to their own wise conclusions.
How does this play out in real life? Let’s look at a few examples from lessons I’m working on with my boys:
- Goal setting and delayed gratification – My oldest son badly wanted a Lego Death Star when he was younger. We looked up the cost together and talked about how he could save up for it. He saved for over a year to get this, and then “Santa” chipped in the rest. Now, almost a decade later, he still plays with this Lego set.
- Wise shopping and money mistakes– I let my kids make some small money mistakes, like spending their money on toys I know they won’t love in the long term (hoverballs and wizard chess, specifically). Making some small mistakes when they’re young, and not saving them from their mistakes, helps them avoid making big mistakes when they’re older
- Some things are more important than money – A big part of personal finance is imparting your own personal values into your spending. If you value travel, you spend on it. If education is a priority, you put your money there. My oldest son happens to treasure a watch handed down from his great-grandfather, so when it broke, I didn’t hesitate to spend $100 to fix a $50 watch
- Price doesn’t always mean quality – We buy a lot of our kids clothes, books, and toys secondhand, and we’ve been doing this since my 14 year old was a baby. Sharing in the excitement of scoring a good deal at a thrift store, consignment shop, or tag sales shows kids that good deals are out there and how to find them. My oldest son still brags about the time he spent $1 on a popcorn popper at a tag sale!
The important part here is the conversation – and not saving them from themselves. Whenever they ask you to buy them something, it’s an opening to talk about how to find a bargain. If they start talking about how everyone else has cooler stuff than they do, talk about aligning spending with your values, and why you don’t value the extra price that goes with the name brand. If they spend all their money on something that they stop playing with in a few days, talk about how that money could have gone towards a purchase that would have lasted longer.
Talking with your kids in an age-appropriate, conversational way about these kinds of money topics helps them learn without feeling lectured. Just make sure it’s a real two-way conversation, and ask them probing questions to help them come to their own conclusions
Positive, Healthy (and Wealthy) Money Mindset
Your kids will pick up on what you say and do – even when you think they’re not paying attention. So be sure to watch how you talk about money around your kids. Share your smart spending excitement, and how hard you’ve worked to reach your own goals. Your kids will absorb and internalize the lessons you’re teaching through your words and actions much more than they would any lecture.
Maybe your own parents brought you up with a scarcity mentality, lived beyond their means, or feared investing. It could be that money was a taboo topic in your house, or a source of stress. Too often the money script you grew up with drives how you raise your kids. But when you know better, you do better. And you can do better for your kids than your parents did for you.
It takes a number of different and varied conversations over many years, being extra careful to not pass stress or fear around money down, and a conscious effort to teach both the practical and intangible lessons. The more open you can be about money with your kids, and the more you share with them – the better equipped they’ll be to become money-smart adults.
Thanks again to Jeremy for inviting me over to talk with you about one of my favorite subjects. And I’d love to know –
The Secret Millionaires Club videos sound like a great resource. I’ll check that out. Our son is probably a bit too young for that. Right now, we’re just focusing on saving and delay gratification. He’s actually pretty good about not buying stuff. He likes having the money more, usually. The death star Lego set looks awesome. Our son would love to have that. Although, he seems to be losing interest in Lego now. Most of it is in pieces in a box… Man, Lego is super expensive.
Yes, Legos are crazy expensive. I was surprised he wanted to save up for it at such a young age! Luckily my older boys are still into Legos, and my little guy has many years to go where he can use his older brothers toys.
We had a rain day a couple days ago and Jr and I assembled our first Lego project. We had a few Polish złoty left over that magically turned into a new Lego set in the Warsaw airport… $20 bought a few hours of good times and a functional toy fire truck that has already put out 100s of fires of questionable origin.
A work friend from back in the day has assembled quite the collection of Legos for his kids, all purchased on Ebay for less than what he could sell them for. So done well can also be an investment.
Legos are definitely expensive but the value is lasting. My 13-year-old son and 11-year-old daughter still play and, more importantly, create with their Lego sets. And I will occasionally catch my 16-year-old daughter playing with the mini-figures, although she is at an age that she may not admit she enjoys playing with them!
The only “quibble” I’ve ever had about the doubly penny scenario comes from not talking about the cumulative/compounding afterwards. Yeah the $10M is a nice payday at the end, but the total take is over $21M!!
Great point, Jeff! That would be a perfect lesson to add on with your kids.
Great post/advice. Thank you!!
Glad to help, Dave!
From a young age, kids should understand the concept of “opportunity cost.” This gets them to move from “I can afford this” to “is this the best use of this money?”
Kids and parents should talk about what makes them happy. Kids can learn that the best things in life are their family and friends doing fun things and developing new skills.
Every kid with a smartphone or game console should buy it with their own money.
I so agree with your advice. My kids don’t have a smartphone (which, for my oldest especially, is rare) specifically because I’ve told them they would have to earn it. They’re not interested enough in one to work for it, so I’m not going to get them one.
Learning how to earn. Money from working – what is fair exchange for effort. Money from investing – what is for reward for risk. Learning how much purchases cost in proportion to earnings.
Love it – great advice! Money = work and work = money are important lessons for a kid to learn.
We’re still at the eating money stage with one and working on the money doesn’t appear from nowhere with the other. 3 and 6 respectively. Still we’re already working it a bit. The earlier you start with the intangibles the better. Great post.
It’s best to start early-kids pay more attention than you think they do! I’ve always been surprised on just how much they pick up on.
Definitely non-money related, but curious on what your thoughts are on this video “How To Train Your Baby To Be Super Smart” – https://www.youtube.com/watch?v=fzfa8G9kFr4
Not something I would do
Child abuse 101, imho.
OK, let’s assume we parents are successful both as early retirees and as educators (i.e. our kids grow up with a FI mentality). What happens when the moment comes they realize we have been retired for a few years and that the family net worth has been going up since then, and they realize all those assets wil eventually be theirs? Wouldn’t that cause a negative effect in their goals and behaviors?
Why will those assets be theirs?
You want to leave your kids enough money so that they would feel they could do anything, but not so much that they could do nothing. – Warren Buffett
I second Buffet’s advice. There’s also another old saw where, when a kid asks how much money “they” (the family) have, the parent replies “We are comfortable. You are broke.” Always set your kids up to not count on an inheritance. Not only does it breed negative behavior, and laziness, but neither of you really know what will be there anyway. There are too many unknowns in life that could cause what looks to be a comfortable inheritance to dwindle away to nothing.
I loved this post. Money is already a part of the conversations I have with my two year old. A recent concept she grasped is that you have to pay for things before you take them from a store. She understands that we have to hand them over to get scanned and then we will get them back. She proclaims loudly when we’re grocery shopping every time I pick up an item for our basket “have to pay for that!”. I never thought I’d be having money discussions this early, even basic ones, but I like how it’s happening organically. I also really agree with letting kids make some mistakes with money instead of rescuing them ahead of time.
I’m still working on that with my three year old. No matter how many times I tell him, he always sounds surprised that we have to wait to pay for something. Lol
What about kids from the same family who end up with very different approaches to money? How much do you think is nature and how much nurture?
In our family, we had very different approaches to saving and spending from the moment we first got any pocket money (age 4-6ish?), and those differences only accentuated as we got older (we’re still at two extremes). I don’t think our experience is unique by any means…..
Good question. My older two kids are very different too, my middle son used to spend every dime the second he got it while my older son has typically been much more wise. The way I look at it, as parents, all we can do is give our kids the tools they’ll need to succeed. It’s up to them how and whether to implement them.
Thanks for breaking down your thoughts into the two main components of money – the physical/mathematical and the intangible. I agree that it’s important to let our children fail, in a controlled environment. Allowing them to make a $10 or $20 (or more!) purchase and learn about the good and bad aspects of that purchase is important. Also, it’s crucial to have conversations about purchases. When my wife and I make decisions about what to buy and what not to buy, we try to discuss our reasoning with our children so they know that a purchase decision is not just about obtaining a material object. We try to help them understand that there is a lot of emotions and feelings that come into play when making purchasing decisions. I think mastering those intangibles are the key to helping our children make wise money decisions as they grow older.
What a proud moment I had today with my 3-year-old. We were waiting to pick up a relative and my little 2-year-old wanted me to buy him a colorful plastic egg that he saw in a kiosk full of plastic trinkets and junk. It would have cost me about 25 cents to get it for him. I told him sorry but he could not have that. It hurts to say no and endure a child’s disappointment, but we Dads are here to teach and guide our kids, not indulge their every whim.
So my 3-year-old surprises the hell out of me by saying to her whining younger brother, “We’re not getting that. We don’t buy junk.” I have said those exact words to her dozens of times when she was acting just like her little brother was at that moment. To know that she is internalizing the lesson, i.e., don’t piss your money away on junk, and applying it appropriately and trying to help her little brother at the same time, was a good feeling and positive reinforcement for me as the Dad.
Yes, our children are watching and listening and learning from us at all times. Every moment is teachable.