Talking About Money

Talking about money with your kids

We live in a consumer-oriented society where money is part of daily life. American kids are always seeing advertisements encouraging them to buy, buy, buy. Once they leave high school, young adults are often flooded with credit card offers. Yet, most lack a basic understanding of personal finance. Some are piling up thousands of dollars in credit card debt. This is why talking about money is so important.

You play a role

As a parent or guardian, you have the opportunity to educate your children about smart money management. Understanding the fundamentals will help them to become financially self-sufficient, with the knowledge to take advantage of financial opportunities. Teaching your kids to develop a healthy relationship with money can have a positive, lifelong impact — and improve your own financial knowledge, skills, and attitudes along the way. You can help them to build healthy, lifelong financial habits just by talking about money with your kids. Share your thoughts with them about how you make your daily spending and saving decisions.

Kids want to learn

Most kids are interested in money and recognize money management as an important step toward maturity and independence. Talking about money with them and teaching them about personal finance will show that you recognize they’re on the road to becoming responsible young adults. By gradually giving them more financial responsibility, they’ll gain experience in planning, making choices, and learning to live independently. It’s never too early to begin teaching your children the basics of good money management.

a timeline for talking about money

Age-appropriate money fundamentals

As soon as your children can count, you can introduce them to money — dollars and cents. When they’re old enough to shop with you, you can introduce them to the ideas of spending, saving, and how money is used to store, measure, and exchange value. You can engage your preschooler by keeping things simple and direct. Talking about money can include teaching them the value of coins as well as everyday things, like toys and food. Talk about saving for the future. Even small children see ads all the time, so it’s important to make sure they understand the difference between a want and a need. You can also discuss why and how financial choices are made. An important concept for preschoolers is also deferring or delaying spending.

You can help your kids learn about money by including them in your daily financial activities and decisions:

Have the kids accompany you on shopping trips and help you to clip coupons, watch for sales, and compare quality, service, and price.
Preparing a meal together can be an opportunity to discuss the value of planning ahead and avoiding waste — concepts that also apply to money.
Before making a major purchase, discuss the pros and cons with the family. Talking about money in this way will help your kids to recognize the importance of weighing alternatives.
If your child asks for expensive items the family can’t afford, don’t give in; stick to your family budget. Use the situation as a teaching opportunity by giving your child the specific reasons behind your decision.
When they’re old enough, let kids sit with you while you pay some household bills, balance your checking account, review your monthly credit card statement, or update the family budget. Give them a sense of how much it costs to cover the various monthly household expenses.
Explain your money management strategies and decisions to your children, whether it’s saving for a family vacation or using your home equity as collateral for a loan to remodel the kitchen.

Around age 10, when children can start to understand the concept of interest, consider taking them to a bank and consider opening an interest-bearing savings account. This will help teach them how to make deposits and withdrawals, keep an account register, balance their account and use online banking to track account activity.

As your child ages, they will have different experiences, including managing a job and a credit card. You can help them learn and develop healthy money management skills by sharing your past money mistakes and what you learned from them. Let your kids know they can always turn to you for financial information and advice. To help teens learn how to manage money, a bank account may be helpful. In fact, teens can also open a checking account geared toward teens (which may require an adult co-owner). Be sure to ask about account details such as minimum balance requirements and monthly fees. Guide your children to use their accounts responsibly.

Having a part-time job can be a good way for young people to learn more about earning money and how to manage it. However, be sure that school remains their top priority. Research suggests that education and training has a major impact on future earning power. Continually monitor whether working is causing schoolwork to suffer. Also, evaluate whether the environment and values of the employer are positive and healthy influences for your child.

Tips for talking about money

Most kids are interested in money and want the rewards of having money management skills. Here are teaching tips you can use to help them learn.

Make it a (daily) conversation

Engage your kids in age-appropriate conversations about money.

Start young

As soon as your children can count, you can introduce them to money — dollars and cents. It’s never too early to start.

Discuss the fundamentals

Once kids understand the idea of money, introduce them to basic concepts about how to use money wisely. The Hands on Banking program offers money management education designed for students from 4th grade through college.

Encourage your kids to:

Set goals and save for them
Make money grow with interest
Recognize needs vs. wants — and make tradeoffs
Be a smart shopper
Keep good records

Let kids make decisions

Talking about money is no substitute for hands-on practice. Giving kids an allowance provides them — on a small, manageable scale — to make their own decisions and their own mistakes — and live with the consequences. Consider an allowance in an amount sufficient to cover essentials and some items that are just for fun. This approach will help the child recognize the difference between needs and wants and set spending priorities. Help your child to create a personal budget and map out a spending plan. Encourage your children to routinely save part of the allowance they receive.

Discuss the pros and cons of a part-time job

Having a part-time job can be a good way for young people to learn more about earning money and how to manage it. However, be sure that school remains their top priority.

Start slowly with credit cards

Credit cards can provide financial flexibility and convenience, but many young adults get in trouble with credit card debt. One option to consider is getting a low-limit credit card for your teens while still in high school. You can teach them how to manage a credit card account, including how to save receipts, check their monthly statements, and charge only what they can afford to pay off completely each month. By learning to be responsible with credit early, your children may be less likely to have debt problems in the future.

Teach a commitment to charity

Encourage your kids to make a habit of giving to charitable causes. Ask them to consider what causes they care about personally and how they would like to make a difference in the world around them. Save any requests for donations you get in the mail and ask your kids to help decide where your family should make donations. Also, encourage your kids to volunteer and consider volunteering with them. Volunteering can be a powerful experience for both parents and kids in terms of recognizing community needs and the benefits of giving back.

Allowance as a Teaching Tool

Often kids are ready for an allowance in elementary school. Giving kids an allowance provides them with an important opportunity to learn and practice money management skills they’ll need throughout their lives. On a small, manageable scale, an allowance lets them make their own decisions and their own mistakes — and live with the consequences.

Because the idea behind an allowance is to let children practice money management skills, many experts advise parents not to link the allowance to the child’s behavior or a list of chores. Parents can take away a privilege (for example, a ride to the mall) if the child misbehaves, but frequently docking the allowance takes away the child’s opportunity to learn about money management. Consider making routine chores part of your children’s responsibility as family members, but give them the opportunity to earn extra money above their allowance for tackling special projects. If you decide to use the allowance as a payment for chores, be clear about what’s expected and keep your agreement.

Some advisors recommend a simple system for determining the allowance amount: a dollar a week for each year of the child’s age (e.g., $10 for a 10-year old child). Others recommend that you determine an appropriate allowance amount by making a list of what you buy for your child in a typical week and how much you spend. Consider an allowance that will cover both essentials and some items just for fun. Be specific about the essentials the child will need to handle.

Rather than giving them the idea that the allowance can be spent any way they like, you may want to introduce three jars: one for spending, one for saving, and one for sharing (or donating). Talk about why each is important. Talk about spending responsibly, why it’s important to save, and why it’s important to give to others. (Giving the allowance in $1 bills makes the money easy to divide.)

Help your child to create a personal budget and map out a spending plan. Separate essentials, such as lunch money, school books, and haircuts, from discretionary items such as CDs, magazines, and sodas. Also, set guidelines for what items, if any, are “off limits” for allowance spending. Be sure to pay the allowance consistently and on time. This approach will help the child recognize the difference between needs and wants and set spending priorities.

Encourage your children to routinely save part of the allowance they receive. Help them understand that since no one knows what the future will hold, it’s smart to have savings. If they set money aside immediately each time they receive some, they won’t be tempted to spend it. Setting financial goals and making choices about how to spend money helps children build and reinforce financial skills.

Encourage your kids to make a habit of giving to charitable causes. Ask them to consider what causes they care about personally and how they would like to make a difference in the world around them.

Helping teens build solid financial skills

Teens are used to instant gratification and a few can have a hard time understanding “no.” Include them when you’re talking about money. This could be discussions of the family budget, challenges the family may be facing and any longer-term goals or priorities. Talking to your teenager about personal and family goals can help them become an informed consumer.

Establishing good credit: a key concept for teens

Start by explaining the importance of establishing good credit and credit score. Institutions and creditors determine an individual’s creditworthiness based on their credit history, or how well debts are repaid. A credit score is a snapshot of a person’s credit risk at a particular point in his or her credit history. Credit scores help lenders determine how likely you are to repay your debt on time. For teens with no credit history, no score can be computed.

You can help your teenager understand that one of the keys to getting the right apartment or qualifying for the loan they will want someday at a good rate may be a strong credit score. Make it clear that once someone has created a bad credit history, it can take a long time to recover. Remind your teen how stressful debt can be and reinforce the point that the credit history they establishes now will increase in importance as they gets older and needs to apply for loans, such as for a car or college.

Be sure to impress upon your teen that responsible use of credit cards is a common way to help establish a good credit history and that paying off the balance each month in a timely manner is an important safeguard against becoming a credit risk.

Potential teen finance pitfalls

Work/life balance

At this stage your teen may be itching to get a job to earn extra cash. You’ll want to emphasize the wisdom in balancing work during the school year with school performance. While employment can provide valuable experiences, studies have shown that employment may interfere with academic performance for teens who work 20 hours or more per week.

Easy access to savings (maybe too easy)

If your teen is earning a paycheck, they may find it easier to access their savings account with an ATM card, a move you may or may not decide to support.

Overspending with credit cards

If your older teen (or college-bound student) wants a credit card, you might take the opportunity to have a serious talk or two about spending. In general, teens with credit cards are less price-conscious, more likely to spend more, and more likely to overestimate their savings than those who pay cash.

Keep in mind, teens can’t get a credit card in their own name before the age of 18. Young people between 18 and 21 need a cosigner or verifiable income to get one. If you decide your teen should have access to a credit card, they would need to be added as an authorized user or joint account holder on a parent’s account.

Problem behaviors to watch for

Paying bills late
Not paying off credit cards in full
Getting lots of late fees
Not communicating when problems arise
Bouncing checks

Let them practice

With children who are mature enough to take on a project, like planning a family vacation, to help instill the value of money, diligence, and hard work. When thinking of the next family vacation, ask your children to plan it out with a specific budget. International destinations provide an added element of learning about foreign exchange. Creating a vacation schedule, pricing out airline tickets, hotel, and rental cars, and then explaining the rationale provides an exercise in understanding how much things really cost, as well as project management, organization, and leadership skills.

Glossary

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