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Posted by Jim McClaflin, EA, NTPI Fellow, CTRC

How to Teach Kids About Money at Every Stage of Their Young Lives

How to Teach Kids About Money at Every Stage of Their Young Lives

Do you want your children to do better financially than you? Do you want them to stick to a budget and invest in their future? Financial education is essential.

A 2018 National Financial Strength Study found that financial literacy is correlated with good financial behavior, such as saving more, spending less than you earn, and being less likely to withdraw from a checking account. It reported that "49% of respondents who got more than 10 hours of financial education reported spending less than they actually earn, compared to 36% of those who got less than 10 hours."

While there is no such thing as being too late when it comes to learning about money and money management, the earlier you acquire financial knowledge, the greater the long-term impact. We've compiled some financial methods to teach your kids about finance at all ages.


For Toddlers

Babies begin to learn from birth. Initially, this learning is based on imitation, such as following the example of a parent who smiles, follows objects, and speaks the first words. Whether you know it or not, they learn and acquire habits.

Start early by setting a good example to follow later. Habits they will develop include budgeting for groceries, paying bills on time, and resisting impulse purchases. By talking to your child about your decisions, they'll learn to make better decisions about what to buy (or what not to buy).


Kindergarten and Preschoolers

Although kids may not understand the value of money at this age, they should understand the need to pay for goods. Children learn from shared experiences, so include them in your shopping trip to help them understand this process. Drop your credit cards at home and use cash to make them more tangible.

By age 7, they would have developed basic financial behaviors, according to a Cambridge University report. Before you begin to panic and think your kids are already late, they've probably already learned the basics: counting and exchange.

  • Counting: It only starts with the number of items, but it should increase to include the number of coins and dollars. Show children the different coins and bills, enabling them to recognize the differences, group them, and count in sets.

  • Exchange: One of the most difficult lessons to learn is that you have to give up something to make a purchase. Money can only be spent once. To learn this, give a child a dollar to spend at the store and focus on choosing the item they want. The child must hand over this dollar to purchase the item and experience the exchange of goods.


From First to the Fifth Grade

With a basic understanding of the power of money, your elementary school student will likely want more. It is the perfect time to teach them how to earn money, save it, and what opportunity costs are. The FDIC has suggested activities to help teach these principles at school or at home.

  • Earning money: Unfortunately, your parents were right; money doesn't grow on trees. You earn money, which should be earned by doing chores for kids this age. Instead of a stipend, reward their work with personal funds. It teaches the biggest lesson in finance: you have to work to make money.

  • Savings: It's time for a purse or maybe a glass jar. Transparent glass allows the child to see the money grow over time. It helps consolidate the benefits of savings. It is also essential to educate children about the benefits of banking. Take them with you to the bank when you want to deposit money and explain the advantages of saving money there compared to saving it at home. Most banks and credit unions offer children savings accounts and many pay interest on deposits. It's also important to explain why you're saving: short-term needs, long-term goals, and setting up an emergency fund. Provide scenarios to explain how to save and why. Honesty will help them understand, learn and appreciate real-world finance.

  • Opportunity cost: A fifth-grader will understand opportunity cost, even if they don't use this term. Opportunity cost is the potential gain lost from other alternatives when an alternative is chosen. You can help your kid understand the effect of impulse buying versus long-term goals. It's a constant struggle that we begin to learn at this point. Explain the difference between wants and needs and how to prioritize needs before wants. We all make impulse purchases, but we must learn to recognize and limit them.


For Sixth to Eighth Graders

At this point, you have established many great financial principles for your kids in high school. The next steps focus on expanding these foundations with income, budget, and contentment.

  • Income: What profession do you want to go into when you grow up? The question at a young age attracts a good answer. However, in high school, there's a real conversation about finding a career that will sustain you throughout your life. Explore different work options and discuss your responsibilities and salary. This is a good time to explain why salary is not what they take home during payday. Explain social security, taxes, insurance premiums, and other payroll deductions.

  • Budgeting: Even if your child doesn't need a personal budget right now, it's good to learn how to make one. Include them when making a budget, and ask them about financial decisions, such as meal planning for your food budget.

  • Contentment and generosity: "Jane has a new Laptop. I need mine too! "It is easy to compare oneself to others, and the pressure is even greater for pre-teens and teenagers. Children at this age need to learn to be content: to be content with what they have rather than trying to keep up. Better yet, they have to learn to appreciate what they have. Kids need to understand the benefits of giving back and donating to charity if they don't already know. 


High School Students

Teenagers seek and need new levels of independence. It doesn't take long for them to live on their own. Many of the lessons at this point are first-hand experiences with a checking account and college budget.

  • Personal Accounts: Even if your child doesn't use the traditional checkbook, all teens should know how to balance a checking account. Personal checking and savings accounts do not create credit but show the ability to manage your finances. While a checking account is technically all a teenager needs, it's also a good idea to open a savings account (if they haven't already) to include the deposits in both accounts in your budget and see the direct impact of compound interest.

  • Credit Cards: As a society, we rely heavily on credit cards, which can have its benefits. However, they can also include high fees and interest, especially those with or without a limited credit history. Teens need to learn the dangers of credit cards and how to use them wisely. Teach them how to pay their balance and avoid buying things they can't afford monthly. An acceptable way to explain interest charges is to compare the interest paid by a bank on a savings account to the charges charged by a credit card for using your money. Research student credit cards together with your child to find the right one for him or her.

  • Paying for college: The cost of paying for college is rising, and so is student debt. As you and your child prepare for the next step, research together, and discuss how you will pay for their education. Not all high school students must go to college; some schools are more expensive than others. With university options, scholarships, and loans available, the decisions they make now will affect the rest of their life.


Last words

Learning to manage money and finances, in general, is a lifelong process. However, the earlier your child develops good financial habits, the more likely they will be financially successful.


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Jim McClaflin, EA, NTPI Fellow, CTRC
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