4 Important Ages to Teach Children Smart Money Habits by age 18
As a father of two boys, I want nothing more than to teach them to grow up to be confident, smart and kind men. I find myself wanting to start with life’s lessons earlier and earlier.
Since starting The Money Twins, I’ve learned that there are still many adults that have yet to learn about important things such as retirement, budgeting and the like. We’ve all made mistakes with money. Let’s all agree to give our children the head start they deserve and learn to be financially independent while they’re young.
I’ve built a framework here based on personal experience, my professional background and hours of research, that will not only teach your kids about money, but give them real world experience and a well needed head start financially.
Teach Your Kids About Money at 3 Years Old
I’ll start by telling you that this is where my wife and I started with our oldest boy. Through trial and error, we’ve developed a system that has already proven to pay dividends (literally but not literally). You should also check out some of the resources at the Consumer Financial Protection Bureau. They have links to articles, games and book clubs to help along the way.
The first lesson that can be taught as soon as possible is that there is something called money. The main goal here is to teach your child that there is currency, and that you need it to buy stuff. This easy and fun activity is somewhat of a game you can play that results in teaching them not only about money, but that you work for it and that saving pays off.
A List of Chores
The first step to teaching your kids about money is to come up with a list of chores. This can be as little as one. I don’t recommend going beyond three because you’ll find that he will probably just settle on 1-2 of his favorite. We made a chart to put on our fridge.
It shows a picture of a boy feeding a dog, a table that is clear of dishes, and a bed that is made. Our son loves feeding the dog, occasionally clears the table and refuses to make his bed. You can decide the chores and easily find free pictures online to represent each one.
The “Commission” and the Reward
Next, put a picture of 2 coins next to each picture. This way, he knows with each chore, he earns two coins (we use quarters). We also have another chart that has a picture of fruits and vegetables with 1 coin next to it, along with a picture of a car with 4 coins next to it. This way, he knows he can get a healthy snack for 1 quarter (representing a need), or a small toy or sticker for 4 quarters (representing a want).
Every day, require him to choose at least one of these chores. He can put the coins in a clear cup or glass in his bedroom. This way, he’ll always have enough money for the healthy snack, but will have to save up a little for a toy or sticker.
Even with Money, Follow the Rules
It will become fun for him. It will also teach him to wait. You must not forget to set boundaries. He needs to know that just because he has money, he still needs to follow the rules. Set a cut off time for the snack. If he’s not behaving, he doesn’t get the toy.
Three years old is a tough one for most parents. “Three-nagers” are defiant and question everything! This serves as a good structure while you navigate through this age.
Teach Your Kids About Money at 6 Years Old
It’s time to introduce your child to the real world! At least a little bit. This age is a good time to teach your kids about money in the form of interest, real life shopping and even entrepreneurship! In an article by Forbes, they talk about taking your 6-10 year old to the grocery store, giving them $2 and let them pick an item to purchase for themselves. This will teach them the limitations that money can have and that you need to choose carefully.
The first thing you can do is introduce them to planning for your weekly trip to the grocery store. Let him sit next to you while you browse your computer for weekly deals and coupons. Point out how it fits into your grocery plan. If you print your coupons, let him save them himself so he can present them to the cashier.
Knowing that most of us probably do some form of our shopping online, you can also teach him the difference between ordering your products through Amazon and buying from the grocery store.
Next, take him to the store with you and let him be active in choosing what to buy. Show him that there are differences in prices and tell him why you chose one over the other. At the end, have him present the coupons to the cashier and then show him how much money was saved. It may not mean much to him just yet, but it shows him that planning ahead can save money.
Start a Lemonade Stand
This next part might come as a shock to some. You’re going to teach your six year old how to start a business! I’m not necessarily talking about an online store here (but maybe?), but something you can work on together. By now, you probably have noticed what your child enjoys doing. Use that to decide. It has to be fun or it won’t last.
Some examples are dog sitting, a lemonade stand or selling fresh produce from your garden. If your son or daughter loves arts and crafts, pick their favorite and sell it on Etsy. Maybe in a couple of years, he or she can start mowing lawns, raking leaves, blowing snow, etc. Let them pocket the money if they sell their toys at a garage sale. Business News Daily has an article on 12 Business You Can Start With Your Kids.
Open a Savings Account
For every dollar your child earns, save 25%. By now, your child’s chore options have likely expanded. You also might consider throwing a little more skin in the game by increasing what they’re earning per chore. Start putting 25% of everything they earn into a piggy bank. This represents longer term savings.
Next, once the savings has gotten large enough, go to your local bank, credit union or online bank and open a savings account. Place your child as a joint owner of the account. Talk to your banker about what programs they have available for children. Nerd Wallet has a list of the best savings accounts for kids.
Ask for paper statements. The important thing is that each month, when the statement arrives, review the balance and point out how much was earned in interest. Explain to him that this is money the bank is paying you for keeping it with them.
Teach Your Kids About Money at 13 Years Old
At 13, we are going to make another giant leap. This also may come off as aggressive, but now we can start teaching about debit cards, banking and investing!
Open a Checking Account
Now that your child is 13, he or she is old enough to get a checking account. Go back to your bank and see what is available in the form of checking accounts for teenagers. Here are some of the best teen checking accounts available. Going through the process will be exciting for them and another learning opportunity. Transfer part of the balance of their savings account or maybe deposit a little cash for their 13th birthday!
I personally don’t see much of a point in teaching your children about writing checks. That being said, they should probably understand what it represents. Let him write you a couple of practice checks or even pay you back for a toy using a check. Show him the connection (and delay) between the balance on the account and writing the check.
Using a Debit Card
What is more valuable is practicing the use of plastic. Arguably, the largest money issue we have in this country is debt. By teaching your kids about money through the form of a debit card, you are showing them that scanning the card represents actual dollars. Just like when they wrote you a check, show them the connection between the purchase and the balance on the statement. Hold on to the card for them until it’s time to go to the store. They can use this for toys, ice cream or whatever it is you see fit.
Open an Investment Account
The last step is to start an investment account. This will be much like the checking account in that you will be a co-signor or joint owner on the account. The new break down for your child’s “income” from chores, gifts and elsewhere will be 50% to the checking account, 25% to savings and 25% to the investment account. If you want to reinforce more to savings, by all means. This breakdown roughly represents the reality of where your paychecks should go.
Where you open the account is entirely up to you. Some options are with your own financial adviser, an online brokerage platform like E-Trade or Fidelity, or even a robo-adviser like Betterment. Stick to mutual funds or ETFs for diversification purposes. Once you’ve decided on the investment, go over some of the companies that are owned. Most likely you’ll have some big names your child will recognize. Compare the company with the business that they started several years ago. Explain how they now own a small piece of that company and can take part in their success or failure.
The main purpose in opening this account is certainly not to learn the fundamentals of what owning a stock means. It’s to expose them to the “ups and downs” of investing and the long term nature of the account. Some of this may not even make sense for several years, but now they have a real life example to reflect on.
Teach Your Kids About Money at 16 Years Old
The last step to teach your kids about money before they’re adults is here. This is when you teach them about budgeting, taxes, credit cards and even saving for retirement! What a novel concept, right?
Their Very First Budget
Now that your son or daughter is 16, they are old enough to get a job. At YouthRules.org they discuss the rules and regulations around teens getting their first job. If they have the itch to be an entrepreneur, then keep encouraging them in that direction. Whichever the situation, it’s time for them to start paying some bills!
A good starting point is a cell phone bill, car payment, auto insurance payment and maybe even paying you rent for living at home! Don’t choose anything that would cause financial stress. School is their priority still. Sit them down and cover what goes into a budget. If you need a reference point, take a look at our article about building your ideal budget.
If your son or daughter has a “typical job”, they should be withholding for taxes. They likely have already learned about taxes naturally or in school. What this lesson is about is how to PAY taxes. Help them fill out their W-4 when the time comes and review their pay stubs when they arrive. Talk to them about why we pay taxes and what it goes toward (in general).
If your child has been making money through a small business of some kind that requires you to claim the income, now is a good time to start teaching them to put some money aside for when it’s tax time.
Save for Retirement
By now, you child likely has a small savings and investment account. Now that there is some official earned income, he can start saving toward his retirement. The very first account that should be opened is a Roth IRA. You can open this account in the same place that the original investment account is opened.
Start by allocating 10% of their budget to retirement savings. Set this up on an automatic transfer directly from their checking account. Follow the same logic for choosing an investment vehicle. Look for diversification through mutual funds or ETFs. What’s important here is to set the standard of 10% or more toward retirement. He likely has already learned about “long term investing” starting at age 13, but now the conversation can expand.
Now is time to introduce a secured credit card. Investopedia discusses the benefits of building credit through credit cards and the best ways to go about doing it. Use the savings account they’ve already built and open a secured credit card. This is the best way to start building credit. The bank will set aside $500 as collateral for the card. This basically means there’s no risk to the bank for an unpaid bill. What’s important is that it’s using their own hard earned money so there are consequences for not taking it seriously.
Let he or she know that this is for filling up the gas tank only (or something similar). Have them set up the card with no more than a $500 limit and to be paid automatically from their checking account. It might be rocky at first, but eventually he’ll understand how it all works.
Discuss with your child that a credit card is not something that adds to your budget. It’s merely a safe way to spend the money you already have. It’s vital to building credit to pay it in full, on time. Without good credit, you cannot buy a house or a car. You likely cannot even rent if it’s bad enough.
Teach Your Kids About Money, A Summary
I know some of these steps can come off aggressive. You might not think they will be ready to understand some of what’s going on here. That actually is probably true. Just remember, there are two goals here…1. To teach your kids about money and 2. to set them up for success early in life.
The average student graduating in 2016 has debt of over $37,000 coming out of college according to Student Loan Hero. We need to be aggressive in our approach to getting in front of it. They need to know that it’s not anyone’s problem but their own. By setting these behaviors early on and allowing them to make mistakes while they’re young will teach them more than any book or classroom curriculum out there. They will have more lessons then they know what to do with when entering adult hood. Let’s make sure money is the one thing they know how to handle.
Sports Fan, Movie Buff, and Anything Outdoors sums it up. Brad loves spending time with his wife, Ashley, and their two boys. He helps empower people to take control of their money, bringing them the confidence to build the life of their dreams.
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About Matt & Brad
They are identical twins and money experts. Matt and Brad Ruttenberg have, combined, over 2 decades of experience as financial planners. They are known for simplifying money and helping others go from living paycheck to paycheck to thriving financially.
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