Teaching Kids About Money: A 5-Step Guide

Image source: Getty Images

Teach your kids how to save and invest when they're young, and that financial literacy could one day help them achieve financial security -- or even great wealth. Unfortunately, too many Americans think money management is an adults-only subject -- and of course, money is not at the top of the average kid's fanciful mind (when was the last time your little ones compared the per-ounce price of their favorite cereals?).

Yet instilling financial literacy in your children does not have to be difficult or painful. Here are some simple steps you can take to set them on the path to financial security.

1. Start early

First off, don't wait until your kids are teenagers before you start teaching them some financial principles. It's rarely too early to teach some simple lessons on business or money when teachable moments present themselves, like when you're debating whether to buy or lease a car or reviewing a credit card offer you got in the mail.

A recent study by Harvard Business School pointed to one particularly useful subject to school your kids in: math. Indeed, it found that more math instruction had a stronger positive effect on students' money management skills than financial literacy courses. Keep this in mind when you're selecting courses for your young ones, or when opportunities arise for extra math instruction, such as math camps or coding classes. If your child has trouble with math, then don't shrug it off, as math skills are more important than you likely realized.

One key math concept to make sure they understand is the power of compound interest, which will help them see how much wealth they can amass if they're disciplined and patient. Thanks to compound interest, as your savings grow, they grow faster.

The following table can be particularly eye-opening, showing what will happen to a single $1,000 investment made at the age of 15 that grows by 10% annually:

If your kids become numbers-savvy from an early age, they'll understand better than most how to build wealth over their lifetime. You might even get your kids a copy of The Motley Fool Investment Guide for Teens. It goes into much more detail about investing for beginners, all in a kid-friendly, easy-to-read style.

2. Talk about finance, frequently

It's funny how adults hesitate to discuss personal financial matters with each other; the subject is somewhat taboo. But it shouldn't be, especially within a family. Let your kids in on the family's financial goals (such as saving for college, retirement, and vacations) and challenges (such as credit card debt or medical bills). It can be an instructive and even exciting family project to work together toward a goal and see progress being made.

For example, if the whole family agrees to save for a summer vacation, then the parents might save money to pay for the hotel and transportation costs, while the kids might save money to pay for special activities such as zip-lining or buying souvenirs. You might buy a little whiteboard and update the family's saving progress on it, keeping it on display in the kitchen or family room. Parents might show how they're saving some of each paycheck and/or cutting some expenses, while kids might run a lemonade stand, wash cars, babysit, or mow lawns in order to come up with their contributions.

It's important to bring up the subject of money regularly in family discussions. The occasional money lecture won't have nearly the same effect as the ongoing, real-life example of your personal financial management.

Image source: Flickr user Kizzzbeth

3. Set a good money management example

Let your children see you managing money responsibly. Let them see the bills that come in and see you paying them. If you review bills together, they can learn a lot. For example, they might see how utility bills go up or down depending on the season -- due to air conditioners or heating. Showing them the cable, Internet, or phone bill can help them appreciate how much certain pleasures cost. You can also take them along to the supermarket and make it a fun challenge to keep each week's spending under an agreed-upon goal -- by using coupons, favoring store brands, and hunting for the best deals in the store.

Image source: Flickr user Steven Depolo

4. Get them started investing

Investing is one of the most exciting aspects of money management. You can start by having your kids build mock portfolios, filled with the companies that interest them most. (Examples might include Apple, Disney, Netflix, Starbucks, Nike, Hasbro, and Under Armour.) Watch the progress of their stocks together, discussing what the companies are doing right and wrong, and what their challenges and risks are. Research companies together, too, at their websites and perhaps via research you can access through your online brokerage.

At some point, you might let your kids actually invest, perhaps via a custodial brokerage account you open with them. Alternatively, you might informally "sell" some of your own shares to your child. For example, if you own 100 shares of Under Armour (which was recently selling for about $40 per share), you can sell two shares to your child for $80. Or, if you're about to buy 100 shares of Nike and your child wants to buy a share or two herself, you can just place the order together -- and order 101 or 102 shares through your broker. Once your child turns 18, she can open her own account at a brokerage and you can transfer her shares to it.

5. Make it fun

Lastly, be sure to make your financial literacy lessons and money management activities as fun as you can. You might have family stock-picking contests, for example, or savings contests, to see who can reach a goal first. At the supermarket, you might make it a challenge to see how much you can save, via coupons or on-sale items.

There are fewer gifts you can give your children that are as valuable and powerful as financial literacy and sound money management skills.