THE BROKEN WALLET

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How to Teach Kids Good Money Habits (this post is sponsored by T. Rowe Price)

I’ve always believed that financial education starts at home. If you don’t teach your kids about money, they’re likely to make a bunch of mistakes in their early adult years – mistakes that can take years to overcome.

But along with teaching them about money it’s also important to start these lessons early. In other words, don’t wait until they’re in their pre-teens or late teens. Some parents wait until their kids are older to talk about saving money, prioritizing spending, and delayed gratification. By this time, though, some young people have already formed bad money habits – which can be hard break.

So today we’re looking at a few simple ways to raise money savvy kids, and this post is brought to you by T. Rowe Price. They have a free educational resource I think you’ll like and we’ll talk more about this in a moment.

1. Normalize Money Chats with Kids

Some people are uncomfortable talking about money – even in their own households – often due to the way they were raised. But regardless of how you grew up, normalizing money conversations with your kids is crucial to helping them build a financial foundation. Therefore, you have to put aside your own insecurities and be transparent about money.

And by saying transparent I don’t mean burdening kids with information they don’t need to hear. Instead, be open and honest about the cost of items if you’re asked, or include kids when preparing the family budget. This not only builds a foundation for financial literacy, it also teaches them to be comfortable talking about money.

The good news, though, is that more parents are starting to have money discussions with their kids.

According to T. Rowe Price’s annual Parents, Kids, and Money survey, “The pandemic’s impact to financial well-being compels more parents than ever to have money conversations with their kids.” The survey also finds that “the pandemic has exacerbated existing racial inequalities, including the racial retirement savings gap.” So in some families there’s an increased urgency to openly discuss money matters with children.

But, of course, these chats aren’t always easy. To help teach kids about money, T. Rowe Price started a step-by-step financial education program called Money Confident Kids, which is designed to engage kids and provide the knowledge they need to be financially confident.

The program uses games, activities, and lessons to teach basic financial concepts. But along with the basics, it also focuses on long-term financial goals and teaching kids how to manage their finances to achieve goals like saving for an education, building credit to buy a new car, and even planning for retirement.

The goal is helping kids build financial capabilities and confidence, so it’s is a valuable go-to resource. To access the program, visit moneyconfidentkids.com.

2. Explain Your Buying Decisions

When children ask for an item on a shopping trip, some parents will automatically respond with, “I don’t have any money.” This often works because most kids understand that it takes money to buy something.

Now, there’s nothing wrong with this statement if you don’t have money. But if money isn’t the issue, instead of defaulting to this statement, try explaining the reason for not buying an item. Maybe your child owns something similar, or maybe they don’t need anything else.

When you always attach “not buying something with not having money”, your kids might draw a connection and think, “as long as I have money I can buy whatever I want.” On the other hand, explaining buying decisions teaches an important lesson. That being, “we can afford it, but we’re choosing not to buy it.” This can help kids become more conscious and intentional with their purchases.

3. Play Shopping

This game is great for helping children understand that money doesn’t alway go far, and it’s simple to set up.

Basically, you’ll create price tags of varying amounts, and then tag some of their favorite toys with prices. You’ll then give them a certain amount of play money (monopoly money works), and from here they’ll shop their items.

Keep in mind, the amount of play money they receive shouldn’t be enough to buy everything. For example, if the price tags add up to $100, you might only give them $60.

The lesson: Sometimes you won’t have enough money to buy everything you like, and you’ll have to choose between item A or item B. 

4. Give allowances for *certain* chores

As far as whether you should pay kids an allowance for completing chores around the house is a topic of debate – and I’ve heard arguments from both sides.

Some parents feel that they shouldn’t have to pay their kids for helping around the house (because that’s what they’re supposed to do). But others believe that paying an allowance for chores teaches them about finance, which I agree with. 

Some kids think money is everywhere and ever-flowing, and obviously this isn’t the case. An allowance is one of the best ways to teach financial responsibility, and kids also learn the connection between work and payment.

This doesn’t mean you give an allowance for every single chore. Rather, attach the allowance to certain weekly tasks, and only give payment if they complete these assignments. 

5. Teach kids about saving and investing

Not only should you give an allowance, make sure your kids save a percentage of the money every week. This can help them develop good savings habits at a young age.

Now, you can open an account for them once they’re ready. But before it gets to this point, consider using a piggybank and have them deposit 5% to 10% of their allowance in the bank. This is also an opportunity for you to play “banker” and teach about the rewards of leaving their money untouched. Money Confident Kids can also help with this because part of the program’s goal is to help kids think beyond bank accounts and understand investment options and long-term wealth building strategies.

Your kids are free to pull money from their piggybank at anytime. However, for the funds left in their piggybank at the end of the month, you as the banker can give them a small bonus or reward. This is an early lesson in how compound interest and investing works.

6. Teach kids about credit

Not only do some kids think money is ever-flowing, some also view credit cards as magic cards that allow them to buy whatever they want. So even if 18 is several years off into the future, don’t forget to teach about credit management.

As a simple approach (and this isn’t something you have to do every time), but if you kid doesn’t have enough allowance money to buy a low-cost item, rather than pay the difference give them a small loan. But don’t forget to include a few conditions.

They must agree to pay back the loan in weekly installments. This doesn’t mean they have to pay back the full amount in a month. But if they don’t repay the balance within 30 days, you’ll tack on a small percentage to the outstanding balance.

Nothing too crazy, but the idea is to teach the importance of repaying credit, and to help them become a smart borrower. The lesson: They’ll owe additional money if they don’t pay back their balances in full within a certain a time period.