Author: Selena Maranjian | March 11, 2019
Teach your kids about money -- and help them become financially secure adults
We raise our children to be able to take care of themselves: We teach them to look both ways before crossing the street and to eat their vegetables so that they can grow strong and stay healthy. Many times, though, we fail to teach them much about money management and investing.
That's a shame, because it can doom our kids to financial struggles throughout their lives, and can mean that they don't get to take advantage of the biggest investing edge they'll ever have: a long investing horizon. It can even mean that they end up depending on us financially well into their adulthood, when we need all our dollars for our retirement.
Here, then, are a bunch of ways that you can raise money-savvy kids. Acting on just some of them will make a difference in your children's lives, and acting on a lot of them can set them on a path toward financial independence.
1. Take them grocery shopping with you
Start at the supermarket -- and this can be when they're quite young. Take them along, and discuss things that you see, in an age-appropriate manner. If Kellogg has a new cereal out, you might discuss whether you think it will do well and if it seems like a smart move by the company. If you own stock in any company with products in the store, you might point that out: Maybe you'd explain that you own shares of PepsiCo, so it's excellent that you're seeing people buying Pepsi sodas, Tropicana orange juices, and Lay's potato chips. You might also point out marketing strategies, such as how supermarkets like to put essential items such as milk way in the back of the store, so that people have to pass lots of products en route there, and that they place impulse buys by the registers, hoping customers or their kids will grab a candy bar or some gum on their way out.
2. Make financial lessons more fun with games
Financial discussions and lessons with your kids don't have to be dreary lectures -- they can be games instead. For example, see how much you can save at the supermarket using coupons. Then see if you can top that next week. Or head to the store with a fixed sum in your pocket, and together aim to buy all that you need with that sum. Kids can learn about tradeoffs that way: They may have to put back the frozen shrimp if they want to buy a certain cereal and ice cream.
3. Model comparison shopping for them
Kids learn from their parents' examples, so be a good example. If you're planning to buy something, include your kids in the process. Imagine, for example, that you're looking to buy a car. They might explore various models with you, as you add up the pros and cons for each, and weigh those against the prices.
If you're going to buy a new TV and you know which one you want, let them see you comparing prices for it. It will be eye-opening for them to see that the TV might cost $675 at one online retailer, $779 at another, and perhaps $700 at a local brick-and-mortar retailer. You might take the lesson a bit further, looking for any coupons you can find, or deciding to wait for a sale. It doesn't have to be about big-ticket items, either. If you want to buy some Kind bars, you might compare their prices at several local retailers. There's likely a meaningful difference.
4. Discuss impulse control for spending
A handy skill to have throughout life is the ability to resist impulse purchases. Model this for your children whenever the opportunity arises. For example, if you see a very cool guitar -- or even a washing machine, for that matter -- at the store, give yourself a cooling off period before you buy it. Sleep on it at least overnight if not for a week, and see if it still seems so desirable. Think about how much it costs and what else you might do with that money instead.
If your child suddenly wants to buy a skateboard, have them sleep on it for a few days. Discuss its cost, too, thinking about what else he or she might do with it. If they're saving for a video game system, for example, buying the skateboard might set them back. These discussions and lessons can happen even with small items such as a bottle of water: Is it really needed? Is there no water fountain nearby? Could that $1 or $2 be put to better use?
5. Discuss alternatives to spending
Another way to help your kids not buy -- or want to buy -- lots of things they see is to get them used to alternatives to spending. You might point out all the people at your local Starbucks, for example, and note that if they spend $4 on a coffee there every weekday, that's 250 times $4, or $1,000 spent over the course of the year. Show your kids how much less it costs to make their own coffee. It's the same with a sandwich and many other items. Sure, occasional splurges and treats are fine, but get them used to thinking about avoiding spending when there are better alternatives.
6. Point out advertising and marketing tricks
Most of us don't know how vulnerable we are to time-tested tricks employed by businesses to get us to buy. You'll serve your kids very well to build an awareness of that in them, helping them be a little skeptical of marketing come-ons. For example, if an item is selling for 20% less than its list price, you might point out that many things are rarely sold for their list price. Point out that when a store is advertising a big sale with lots of items "up to 60% off," that "up to" means that most items might be discounted only a little, if at all.
Point out how cashiers ask them if they want fries with their order or if they want the larger popcorn at the movie theater "for only $2 more" -- those are examples of upselling. Point out how a menu might feature a $45 steak in order to encourage many diners to choose the $30 one instead of the $20 one. The high-priced item makes them think that they're being moderate, choosing something in the middle of the price range. Explain loss leaders -- when a store advertises a very marked-down item in order to draw shoppers, so that they'll buy other things once in the store. Point out how stores will often have a buy-one-get-one-free sale instead of just discounting the items by 50%. That makes shoppers buy two instead of just one. Raise savvy shoppers.
7. Give them an allowance
Consider giving your kids an allowance. Yes, it's free money that they didn't work for, but it's still money that they can learn to manage. Whatever they receive each week may help teach them about tradeoffs as they decide what to spend it on and what to not spend it on.
Recent data from the RoosterMoney app shed some light on just how much kids are receiving these days in allowances. It found average weekly allowances ranging from $5.24 for 6-year-olds to $8.10 for 10-year-olds to $12.26 for 14-year-olds. Another rule of thumb used by some folks is paying a dollar per week for each year, so an 8-year-old would get $8 per week and a 13-year-old would get $13 per week. Of course, different regions have different costs of living, so think about what's right for your kid(s).
8. Let them earn more money from you
Whether you pay your kids an allowance or not, you can definitely help them have more money by letting them earn it from you. This can take lots of forms. They can do chores, such as cleaning bathrooms, mowing the lawn, washing cars, or perhaps doing laundry. (Consider having some chores, such as making their beds and tidying their rooms as ones they should do without pay.) Once they're old enough, you might even pay them for preparing dinner once a week.
Other possibilities include paying them for every non-school-related book they read or for every A or B they earn in school. Think about what they could use some motivation to do, and whether offering a few dollars would be a win-win proposition.
9. Help them find other ways to make money
Your kids can also make money from other people than you. For example, they might have a yard sale, selling toys and things they no longer want. (They could sell some of your unwanted items, too, perhaps for a commission.) There's the tried-and-true lemonade stand, or something similar, as another option. If they're skilled, they could knit and sell sweaters or repair neighborhood bicycles or fix computers.
If they're old enough, they can earn a lot from tending neighbors' yards and/or babysitting or dog-walking. Babysitters, for example, were recently earning around $10.75 per hour in the Detroit area, and more than $18 per hour in New York City. They should collect a little extra if there are two or more kids being watched, and having any kind of credentials, such as knowing CPR or completing a child-care course for babysitters, can also help.
10. Show them how you budget
Unless you always have enough money for all your needs, you would be well served by having -- and sticking to -- a budget. And if you want financially savvy kids, it would be great for them to see you budgeting. Budgeting can seem dreary, but it should actually be rather interesting and potentially eye-opening to track your spending over a few months and see just where your money is going. You may not realize, for example, that when you spend $75 or so once or twice a week on dinners out with the family, that it's costing you more than $5,000 annually.
Figure out where your money is going, and decide where you want it to go. Take out allocations for retirement savings and college savings and any other priorities before you start spending on discretionary expenses. Let your kids see your budget -- or even work on it with you. They can benefit by learning how much various things (like electricity and groceries) cost and they can use those budgeting skills later in their own lives.
11. Help them manage their money
Once your kids have money of their own coming in, help them manage it. One classic system is to have them divide their money into thirds -- saving a third, spending a third, and giving a third to charity. An even better system uses quarters: Have them put a quarter of their income in savings, let them spend a quarter, have them give away a quarter, and invest the last quarter. Investments can be different from savings, after all: Your child may be saving toward a new computer or bicycle, but his or her investments will have a long-term focus -- for college or an eventual down payment on a home or even retirement.
If your kids are having trouble doing everything they want with their money, have them list all their wants -- and then rank them. They can save for or buy their highest-priority items first.
12. Broaden their vision -- teach them about poverty
Teaching your children about poverty in the world can achieve multiple results: It can make them appreciate just how fortunate they are. It can make them more aware of inequality in the world and of how hard many people's lives are. It can make them more generous and open-minded throughout their life. And it can further help them understand the value of a dollar.
You might direct them to the dosomething.org website, for an organization of young people trying to make the world better. The site offers lots of eye-opening statistics on poverty, such as "Nearly half of the world’s population -- more than 3 billion people -- live on less than $2.50 a day." That should make an impression on kids earning close to that much from an allowance alone.
13. Explore careers together
If kids enter (and, sometimes, leave) college without giving much thought to how they want to make a living, they can end up in careers they don't like that much and/or they can end up earning far less than they'd like. No one has to know just what they want to do for work while they're still a kid, but it can help to start thinking about appealing careers and fields even at a young age. You might discuss different jobs with your kids -- and even look into sample salaries, too, to give them a sense of which jobs are relatively lucrative.
Some online searching can help. The folks at Salary.com, for example, have listed the most popular jobs and median salaries for them. While dentists earned $150,889 and nurse practitioners earned $97,448, teachers earned $53,183 and personal trainers earned $50,520.
14. Take them to the bank with you
Help your kids think of money and its management as a part of life that's as common and ordinary as grocery shopping. Take them to the bank with you, for starters. Let them see you withdrawing money now and then and explain that you make deposits there, too, perhaps having your paycheck direct-deposited. Explain about interest -- how you earn interest on your savings, paid to you by the bank, which in turn lends that money out to those taking loans for homes, cars, and so on, charging borrowers interest on it.
15. Open a bank account for them
Set up bank accounts for your kids, too, so that they can see their balances grow over time, via interest and perhaps via deposits, too. (This exercise will be more exciting in times of higher interest rates, of course.) You'll probably be a joint owner of the account. Make sure the account you open has the features you need, such as no required minimum balance, low fees, and a good interest rate.
By having their own accounts, they will receive regular statements, which can make them feel grown up, and which you can review together. Teenagers might even open checking accounts, though these days many young (and older) people are paying bills and buying things via electronic payments.
16. Let them see you investing
Parents can be powerful teachers simply by the examples they set, and that applies to investing also. Let your kids see you checking your portfolio and reading up on your holdings -- in the news and when annual reports arrive. Talk about stocks that you're thinking about buying, and why you're interested in them. Discuss your winners and your losers, explaining why each was a winner or loser -- that can help your kids see that successful investing includes making mistakes. (It can even help you in your own investing, to go through the exercise of figuring out what went right or wrong.)
17. Explain the difference between investing and speculating
As you aim to build young investors, be sure that your kids know the difference between investing and speculating. Investing in stocks involves buying real stakes in real companies -- ideally healthy and growing ones. Shareholders are part-owners and can profit over the long run from the companies' growth.
Speculating, on the other hand, is more like gambling than investing. Examples of speculating include buying lottery tickets or penny stocks, along with day trading, trying to time the market, or acting on some hot stock tip without researching the company first. Those are all risky endeavors and often lead to significant financial losses.
18. Teach them the power of compounding
A great way to drive home the power of investing and to get your kids really interested in it is to show them how much money they can accumulate over time. Teach them about compounding -- not only compounded interest from bank accounts, but also the compounded growth of stocks over time.
For example, they might be interested to learn that if they save and invest just $500 per year for 50 years, from age 15 to 65, and if their money grows at an average annual rate of 8%, they can amass more than $300,000. Once they're older and working at real jobs, if they can sock away $10,000 annually, they can end up with more than a million dollars in about 28 years. Yes, that's a long time -- but if they do it from age 28 to age 56, it can help them retire early!
19. Make sure they appreciate the power of time
Your kids should not only learn about compounding, but they should also understand what a profoundly wonderful position they're in now, because of their young age. Someone in their 50s socking away large sums every year may not be able to amass as much money as your kids can, if they start early with small sums. They may feel like they don't have much money, don't have a job or career, and don't have much going on for themselves, financially speaking, but they have a huge advantage in their long time horizon.
20. Encourage long-term thinking
You don't have to suggest that your kids try to never spend their money, but you can encourage them to keep the power of compounding in mind as they consider various possible purchases. For example, if they forego spending $50 on something today, they can keep that money in the bank and have more money later, thanks to interest. Or they could invest it instead, for many years, doubling or tripling it.
Similarly, if they have a big-ticket item on their wish list, they can forego some smaller purchases in order to save for the bigger one.
21. Invest in stocks together
The power of compounding should have your kids at least somewhat intrigued by the thought of investing. You can get them started by investing together. Kids under 18 can't have brokerage accounts of their own, but there are several ways to get around that. You can open a guardian account (where you own the assets) or a custodial account (where the assets are theirs) with and for them, for example. Less formally, you might buy some stocks for your own portfolio and add a few shares for your kids -- or designate a few shares as theirs. You might also enlist them as advisors, and you can study stocks together picking ones that look most promising for your portfolio.
22. Focus on stocks of interest to them
For best results when you get your children started investing, focus on companies that are of interest to them. Insurance companies or medical supply companies, for example, might leave them drowsy, but there are gobs of companies that they interact with frequently or just admire -- such as Starbucks, Nike, Netflix, Apple, Walt Disney, Hasbro, Mattel, Spotify Technology, Snap, Activision Blizzard, Under Armour, Boeing, Costco, McDonald's, Coca-Cola, and Chipotle Mexican Grill.
23. Follow and discuss business news together
Make a habit of regularly reviewing and discussing business news. You should particularly do this with companies in which you're invested, but also keep up with companies you're thinking of investing in -- and others as well. Even bad companies or unappealing investment candidates can be instructive.As an example, children's clothing retailer Gymboree has filed for bankruptcy protection and is shuttering its stores, but that doesn't mean it's all worthless. Its former competitor Children's Place is aiming to buy its Gymboree and Crazy 8 brands, while Gap plans to buy the assets of its higher-end clothing line, Janie and Jack, such as its website, customer lists, and intellectual property. Meanwhile, Southwest Airlines is expanding its reach by starting flights to Hawaii. These kinds of stories can help kids understand how companies grow, compete, succeed, and sometimes fail.
24. Play games that teach financial lessons
Learning about money management or investing and developing skills needed for such endeavors doesn't have to involve just reading or discussions. It can be fun -- as much can be learned through games. Board games have long been instrumental for that, and today many fun and instructive games also exist on our smartphones.
"Monopoly," for example, can help youngsters grasp the concepts of buying properties and paying rent. "The Game of Life" is even broader, expecting players to go to school, establish careers, start families, and so on. "Settlers of Catan" offers practice in trading and resource management, while the video game Minecraft has players dealing with currencies, exchange rates, and other economic concepts.
25. Discuss loans, such as mortgages and car loans
Help your kids understand the world of loans, and how they help people afford things such as cars, homes, and college educations. If you have a mortgage, you might share a mortgage statement with your children, showing how you're not just paying down your principal, but you're also paying interest. Show them your interest rate and explain how it relates to your monthly payments. Talk about how you had to be approved for your home loan by your lender and that you had to make a down payment on the home, too. At your local bank, you might show them interest rates being advertised for mortgage loans.
Talk about credit cards, too, and how using one means that you're essentially borrowing money from the credit card company and that you'll be charged interest if you don't pay off your bill on time.
26. Teach them how credit cards work
Mismanagement of credit cards has led many people into deep financial trouble, so be sure your kids know how to use credit cards responsibly. Explain, for starters, that they should never be charging more than they can afford to pay. Point out that every card has an interest rate that you'll be charged if you start carrying debt on it, and that the interest rate can go up and down -- sometimes suddenly soaring to more than 20% or close to 30% if you're late with a payment, if a card has a "penalty APR" feature. Make sure they understand what a 30% interest rate would be like: As an example, if they owed $1,000 on their card and were being charged 30%, they'd have to fork over around $300 over a year, just in interest. They'd still owe the $1,000.
The dangers of credit card debt are real, but discuss the advantages of credit cards, too, such as not having to carry much cash, getting some perks such as cash back and rewards, and being able to build a strong credit record and credit score. Young people can start out getting practice paying with plastic with debit cards (though they're inferior to credit cards in several ways) or with secured credit cards that don't let debt become a problem.
27. Inform them about student loan debt
Your children are likely to eventually consider taking on student loan debt in order to help them get through college. Be sure they understand what that means. Crunch some numbers together, perhaps using an online calculator, to show them what, say, a $50,000 debt would cost them in monthly payments at various interest rates. The finaid.org calculator, for example, shows that a $50,000 debt with a 7% interest rate would cost about $580 monthly for 10 years. That totals nearly $70,000, reflecting interest payments of close to $20,000.
28. Explain how gambling works and why they should avoid it
There are lots of ways to gamble, and many of them will seem fun to your kids. Casinos, for example, certainly make it look fun, with lights and sounds and all. You might point out to your kids that Las Vegas, which shimmers with myriad lights and lots of fancy, extravagant casinos, is built and supported mostly with money lost by the gamblers there. Explain that different games have different odds, and that skilled players with sound strategies are likely to fare better than beginners. Lotteries sport some particularly terrible odds. The Powerball jackpot, for example, recently sported odds of 1 in 292,201,338. You can help your kids appreciate just how big a number a million is -- this web page features a million dots (and you have to scroll to the right to see them all) -- and then point out that the jackpot odds are like being the winning dot on almost 300 pages like that.
Remind them of the power of compounding and long-term growth via the stock market and how it's a much better way to get rich.
29. Share your financial blunders with them
We all make mistakes, and even the best investors do. Warren Buffett, for example, has pointed to his purchase of Dexter Shoes as a regrettable move, along with his not buying shares of Walmart long ago.
Share your mistakes with your kids, so that they can learn from them. It's always best to learn from others' mistakes, after all, instead of from your own. You might tell them about how you were late to start saving and investing, how you bounced a check at your bank, how you let too much debt pile up on your credit card, how you bought a more expensive car than you really should have, or how you didn't have an emergency fund years ago, when a costly car repair materialized.
30. Share your financial goals with them
Likewise, share your dreams with your kids -- financial or otherwise. Financial goals might include saving a certain sum for their college educations and accumulating a sufficient sum for retirement. More specifically, you might be socking away 10% of your salary in a 401(k) at work right now, and might be aiming to increase that by a percentage point each year, until you're saving 15%.
When your kids know about the family's financial goals, they might even be able to help, perhaps by chipping in with some earnings from a part-time job. At the very least, they may better understand why you don't want to buy the latest video game system for them right now, as you have certain goals you're working toward.
31. Have family financial goals
As a family, you all might have some joint financial goals, and you can work together to achieve them. For example, perhaps you all would like a home theater. If so, take a little time to figure out how much is needed for that, and how you can save that amount. If one of your family cars is ancient and ailing, you all might research cars together, learning what various models cost, and you might save toward one.
Another family goal might be a vacation to a destination everyone is eager to visit -- or maybe a backyard ice rink for winter recreation.
32. Explain how taxes work
It's also good for kids to understand how taxes work. You can explain how everyone's income is subject to income tax, and that employers typically withhold money from each paycheck, so that workers don't have to come up with a large sum once a year at tax time. You can point out other taxes, too, such as sales taxes and property taxes. If you show them your paycheck, you can point out how there's a "FICA" tax taken out of your wages for Social Security and Medicare.
You might also point out what all these taxes do: They support local governments and the federal government, they pay for police and fire fighters, for courts and judges, for schools and teachers, for roads and bridges, and so on.
33. Give them incentives to save
It's good for your kids to get in the habit of saving money, and you can help them in that endeavor. For example, you might offer some matching funds, just as many employers do with workers' 401(k) contributions. You might offer to match contributions to their savings accounts dollar-for-dollar up to a certain sum each week or month. Or you might tell them that once their account reaches a certain balance, you'll add a specified sum to it.
34. Give them financial fare to read
Just as you would be well served by regularly reading about business, investing, and money management, so will your kids. If they're teens or clever pre-teens, you might start them off with our Motley Fool Investment Guide for Teens: 8 Steps to Having More Money Than Your Parents Ever Dreamed Of or with Peter Lynch's book Learn to Earn. Younger kids might read Growing Money, Finance 101 for Kids: Money Lessons Children Cannot Afford to Miss, or National Geographic's Everything Money.
Older kids might find magazines such as Fortune or Bloomberg Businessweek more interesting than they thought they'd be, and teens who are very interested in finance and business could benefit from The Wall Street Journal. Remember the Fool.com website, too, where we offer gobs of articles on investing, businesses, and personal finance every day.
35. Keep talking about financial matters together
Finally, just keep the conversation going about money -- its role in your family's life today and the role it will play in your kids' lives in the future. Don't just do a few things from this long list of activities to make your kids money-savvy. Aim to do a lot of them, and to keep it up.
Having children who know how to save, how to keep their spending under control, how to use credit responsibly, and how important and powerful it is to build wealth through stock investing can pay off handsomely -- for them and for you.
Selena Maranjian owns shares of Activision Blizzard, Apple, Boeing, Costco Wholesale, Netflix, Starbucks, and Walt Disney. The Motley Fool owns shares of and recommends Activision Blizzard, Apple, Chipotle Mexican Grill, Hasbro, Netflix, Southwest Airlines, Starbucks, Under Armour (C Shares), and Walt Disney. The Motley Fool is short shares of Hasbro and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Costco Wholesale and Nike. The Motley Fool has a disclosure policy.