It’s never too early to teach your kids about money. Whether they count coins in a piggy bank, set aside their allowance to buy special toys, earn gas money with a part-time job or start investing for the future in a Roth IRA, they can learn important financial lessons at every age. Teaching kids the following habits can help them build a strong financial future — and help them in many other ways, too.
“A person’s relationship with money is daily and lifelong, therefore it is crucial to life success, security and freedom to master it,” said Sam X Renick, a financial educator who created the Sammy Rabbit storybooks and financial literacy program to teach young children about money. “We are always talking and teaching about money — directly, indirectly, verbally and non-verbally. The real question is doing it with intention, consciousness and purposefulness.”
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Give Every Dollar a Job
“Whether this is helping your grade schooler save up for that toy they have their eye on, or helping your high school student with an after-school job open a Roth IRA — help them think through where their money is going,” said Laura Cuber, a certified financial planner in Schaumburg, Illinois. “For younger kids, this can look like helping them divide their allowance into save/spend/donate categories. For high school-age kids, this can mean having them develop a budget for college expenses. Money is a powerful tool, but a lot of people don’t know how to use it effectively; budgeting skills are the first step to making sure your money is working the way you want it to.”
Keeping track of what comes in and goes out can help kids learn the value of money. “My 13-year-old daughter keeps track of her ‘account’ on a ledger app,” said Jennifer Baick, a certified financial planner in Bellevue, Washington. “She earns money through her chores, gifts and allowance. Every Sunday is payday, and I reconcile her ledger against a bank account she has at a bank electronically connected to mine. She has to remember to log all debits and credits. I often quiz her on how much she has, and whether she has remembered to debit her account when she orders something online.”
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Even ordering items online can be a teaching opportunity. “Both my 10 and 13-year-old daughters actively curate their Amazon Wish Lists,” Baick said. “I don’t let them purchase anything on impulse. They put items on their lists, and let them sit there for a while. It forces them to think about whether they really need or want this item.”
Make Saving an Easy Habit
Setting financial goals for the future and saving regularly to get there — whether it’s to buy a video game in a few months or to buy a car or house in a few years — is an important lesson at any age. “Making a habit of saving money teaches a child to delay gratification,” Renick said. “The habit of saving emphasizes being prepared and helps kids with setting goals, planning, thinking ahead and making better money choices. The habit of saving builds confidence and esteem. It says to one, my future is important. It is worth planning and sacrificing for.”
Whenever they get an allowance or a paycheck, have them set aside a portion of the money for a specific goal before they have a chance to spend it on anything else. “The key to saving as well as investing is to make it a habit and priority,” Renick said. “As Warren Buffett shares, you want and need to save before you spend; not save what is left after you spend.”
When they have their first job — even if it’s a summer job or part-time work after school — help them set up a Roth IRA so they can start building tax-free savings for their future. There’s no minimum age to open a Roth IRA — the child just needs to have earned some money from a job. They can contribute up to the amount they earned for the year, but no more than $6,000 in 2021. They can open the account at a brokerage firm, bank or mutual fund company, and the parents usually need to sign custodial forms for a minor. A Roth IRA is particularly valuable because of its tax advantages — they can take out the contributions at any time without taxes or penalties, and they can withdraw the earnings tax-free after age 59 1/2.
“Some parents like to set up matching contributions to incentivize saving,” Cuber said. “For example, if your child saves 10% of their summer job income in their Roth IRA, you can match dollar for dollar or even offer to max out the contribution for them. 10% of one summer’s income might not add up to much, but it will get them in the habit of saving for retirement and will help them get the hang of managing an investment account.”
Baick recommends that the parents and kids sit down together and check on the progress of the account whenever they add money to it. “Even if the parent is funding this, it is important that the parent and child log into the account together and celebrate the act of putting something away,” she said.
It can also help the kids to see their parents make similar moves with their own money — such as talking about their long-term goals with their financial planner. “I love it when my clients bring their kids into the office and, although boring, I know the act of seeing their parents prioritize set meetings to learn about, care for and make decisions around long-term money is meaningful,” she said.
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When the kids start their first full-time job with a 401(k), it will just be natural for them to have money invested automatically from their paychecks for the future — especially since they’ve seen how much their savings has grown since they were young. Some parents even arrange to have their kids meet with their financial planner to discuss their own goals for their money after they graduate from college.
Learn Investing Basics
After kids learn about the importance of saving for future goals — and watch their account grow as they add more money to it — then they can take the next step and learn about investing. “Something kids need to know is money will make more money for them,” Renick said. “They need and want to put it to work for them. That is what investing regularly does.” He calls compound interest a “super power.”
Help them choose the investments for their Roth IRA. “Once the money is in an investment account, it can be a good way for them to learn about the basics of investing, such as the power of compounding interest, making sure you have a diversified portfolio and understanding stock market risk,” Cuber said.
Talk about matching their investments with their time frame. Since they won’t be tapping their retirement savings for a long time, Baick recommends investing the Roth money in a globally diversified exchange-traded fund or mutual fund. Talk about how the money is invested and can grow for the future. “$6,000 invested at age 15 can grow to about $250,000 at age 65 if it earns 7.5% per year. Amazing!” she said. That’s just from one $6,000 investment. If they continued to add $6,000 per year and their investments earned 7.5% per year, they could end up with almost $3 million by age 65. Even if their investments returned 6% per year, they could still have more than $1.7 million by retirement.
When they get old enough to understand, show them charts of historical stock market returns — illustrating that in some years the market is down, but in most years it is up — and run different average return numbers through a future value calculator with them to show what can happen to the money in different scenarios.
Teach Digital Financial Literacy
When many of today’s parents were young, they had to learn how to balance a checkbook. Their kids need different skills now. “Parents of older children should teach their kids how to manage their finances electronically by helping them get comfortable using a debit card, setting up electronic transactions at their bank or through other mobile apps, and making online purchases,” Cuber said. “Not being able to see the money can make it harder to conceptualize, and the sooner kids learn that there are real financial consequences to these almost invisible financial transactions, the better off they’ll be.”
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They also need to learn how to build their credit record to their advantage, without getting into debt trouble. “College-aged kids have to learn how to use a credit card prudently and begin building their credit,” Baick said. “They should get educated about how interest payments accrue, and how dangerous it can get if it is not paid off. They should also track their spending and research credit cards to match the credit card rewards to their personal spending and choose the card that works best to their advantage.”
It’s also important to learn about some key financial administrative tasks. “In high school, my father had me begin preparing our family’s tax return,” Baick said. “This exercise taught me the value of organizing information, accurately reading statements and entering data and paying taxes to the government. This exercise made me confident as I got older and had to fill out FAFSA forms, medical forms, etc. None of it intimidated me.”
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