Money isn’t always easy to come by. It’s important for kids to learn how money works and what it can do for them, so they can grow up with a solid understanding of the world around them.
Teaching kids about money management is an essential life skill that will help shape their future – one where financial security is attainable through hard work and determination.
If you don’t teach your kids how to manage money, somebody else will. And that’s not a risk you want to take! We’ll show you how to give your kids the head start you wish you had and set them up to win with money at any age.
This article outlines some tips on teaching kids about money management, including budgeting, spending, saving and investing.
How Do You Explain Money to a Child?
The best things in life may be free—but most things cost money. Buying toys, video games, food, Starbucks, or really almost anything—costs money.
Being aware how much money gets spent will help kids make wiser decisions.
Our ancestors may have exchanged goods they possessed or services they could perform for those they might need in return.
Actions like trading their livestock to a doctor in exchange for medical care or their basket of eggs to a candlemaker for a refreshed supply.
Today we rarely barter and instead use currency in its various forms, like paper money, credit cards and transfers from bank accounts.
For real money, grown-ups know the dime has more value than either a nickel or penny, but to kids this may not be obvious.
The first step in learning about money and finance is understanding what money is all about. That means taking the time to teach kids how to value a dollar, what things cost and how to earn money.
It also starts with the definition of money.
What is Money?
What does it mean when someone says, “I make a lot of money?” Or, “I have a lot of money?”
Money is any medium of exchange which you can use to pay for goods and services with a mutually-agreed value. That means both sides agree to the value of the product or service being bought as well as the value of the money accepted in exchange.
Currency is the term used by countries for the money in circulation within the economy. Said plainly, the coins and bills people use through paper (coin) money, bank accounts, credit cards and more. Even cryptocurrency.
What Should I Teach Kids About Money?
Kids need to know two main skills when it comes to money—and the earlier, the better.
- Ability to identify money
- Ability to tender money and make change.
Very basic to adults, but kids learning about banks and money won’t know this without someone there to teach kids about money.
Even more, schools probably won’t teach these basic skills in classes because the primary focus for schools isn’t money outright, rather math on its own.
You can teach your kids about money as soon as they learn not to put it in their mouth—something my wife and I have avoided so far with our one year old, but only because we don’t carry physical money.
Regardless of when you start, though earlier is better, your child should count nickels (and dimes, quarters and bills!) by the end of third grade when they enter upper elementary grades. That means counting and making change.
Once your child can handle this task, it might be time to move onto debit cards for kids or even their own bank accounts for saving money.
Related: How Do Prepaid Debit Cards Work?
When Can I Teach Kids About Money?
Teaching kids about money starts as early as being able to walk and reach up to grab something off the coffee table or counter.
When kids can get a hold of money, they can start to learn about money. Soon enough, they’ll be young kids and expecting an allowance for chores they perform and eventually, want to save for college and invest money as a minor or even begin trading stocks as a teenager.
Learning about money, how to budget it, save it, spend it, and invest it starts early. They’ll quickly need help understanding it through useful lessons, good money habits, and seeing how you go about doing these same tasks.
How to Teach Preschoolers & Kindergartners About Money Management
1. Teach Your Kids Their Money ABCs
At the same time your kids learn to read and recite their ABCs, they should also begin learning their Money ABCs. This includes how to count, make change and handle money.
You have six different denominations of coin in circulation today in the U.S. A penny, nickel, dime, quarter, half dollar and dollar coin.
Bills in circulation today include the $1, $2, $5, $10, $20, $50, and $100 bills. In the past, the U.S. economy had bigger bills in circulation, including denominations of $500, $1,000, $5,000, and even $10,000.
Teaching your child about money starts with teaching them the concept of the dollar. Coins act as fractions of that unit while bills are multiples of that. 100 pennies; 20 nickels; four quarters; two half-dollars and one dollar coin all make up the same amount of money: $1 (one dollar).
Understanding the concept of money and how everything bases on one unit of currency, the dollar, is important for children.
In order to allow them to understand, you must teach them about dollars. For instance, $1 can buy X which equals Y. They might be different in count but the same in value.
In other words, 10 pennies will buy the same as one dime; four quarters has the same worth as a single dollar bill.
As a fun exercise, ask your child to think of how many combinations of coins might equal 50¢. The answer: 37 combinations (which includes simply using one half-dollar).
Consider repeating this game with other amounts, such as a quarter (14 combinations) or even a dollar (293!).
2. Set an Example
Money habits form early, even as young as seven years old. Be mindful that little eyes are watching your decisions on how to manage money.
If you slap down a credit card five nights a week at the restaurant, or each time you go to the grocery store or even when making an online purchase, they’ll eventually notice. Just the same, if you and your spouse argue about money, they’ll catch wind of this in no time.
Therefore, you’ll want to set an example they can follow. That includes budgeting your money, holding regular finance reviews, saving for retirement, managing debt and minding personal finance decisions. In general, you want your kids and teenagers to manage money well.
3. Show Them the Cost of Money
Simply saying something doesn’t always convey meaning. Actions speak louder than words.
You’ve got to do more than just say, “That pack of gum costs $2.” Instead, you can grab money from their piggy bank and walk down to the store to hand the money directly to the cashier. Let your kids handle the cash and change they receive.
Do this time and again and they’ll get the picture. Once you see their understanding, it might be time to upgrade to a debit card because handling physical cash and coins has become less common since the pandemic arrived.
But, performing simple actions like this carry greater impact than a conceptual explanation outside the store.
4. Start Saving Money Now
Saving only gets harder as you wait. Not building those habits early makes them more difficult to adopt later in life, especially as you get accustomed to taking other actions with your money.
Therefore, begin saving as early as possible and making it visual for kids to understand these money lessons easier. That means having a piggy bank or some other jar or container to hold their money.
To amp up the impact, consider making the container clear or translucent so kids can see how much money they’ve managed to save. Piggy banks do the trick, but you can’t see how much you’ve saved with a simple glance.
5. Understand Opportunity Cost
Opportunity cost is the cost of not making a choice, or the value of the next best thing you give up whenever you make a decision on how to spend your time or money. Said differently, opportunity cost is the loss of potential gain from other alternatives when you choose one alternative.
It’s important for kids to understand as early in life as possible.
As they grow up and decide what jobs to take or whether to spend time on extracurricular activities like music lessons or sports, opportunity costs will come into play often.
Without them understanding how costly those decisions may be, they might not make the best investments with their time or money. They need to see the value of their time and their decisions.
Related: Best Robinhood Alternatives
How to Teach Elementary and Middle School Students About Money
6. Don’t Give Allowance, Give Commissions
Don’t just give your kids money for having a pulse. Instead of giving them passive income, make them earn it by doing chores around the house.
This teaches them the value of hard work and that earning money equates to work provided. You can even pay extra money if your kid discovers an innovative solution to a problem or a more efficient and effective way of accomplishing a task.
This shows higher-order thinking and creativity earn rewards. This type of thinking creates the most desirable employees in today’s market and rewards these high income skills accordingly.
In sum, don’t simply automatically transfer money onto your child’s Greenlight debit card or bank account, pay them commissions for chores they perform around the house. Make kids understand money is earned, and not just given.
7. Avoid Impulse Buys
Impulse buys ruin budgets because they don’t ever get factored into the expected monthly spending categories. Because kids haven’t yet had enough time to develop a close relationship with delayed gratification (nor a fully developed prefrontal cortex), impulsive actions can take over.
Imagine also the money going out the door doesn’t belong to them. That purchase has no chance of being considered smart money decision making. Instead of giving in, let your child know they can use their hard-earned commission (see the item above) to pay for it.
This makes them connect the accomplishment of earning money with the pain of paying. It makes them prioritize their spending better and allows them to see through the decision clearer. They’ve got skin in the game when you do this.
It might also serve you well to have them wait a day before they purchase anything over $15 (or whatever your arbitrary cut off limit might be). In all likelihood, the desired item will still be available tomorrow and can make a level headed decision the next day.
8. Stress Giving Back or Gifting to Another
An important element to keep in mind for teens as they come of age is to teach kids about giving back or gifting to others. This can include financial gifts to loved ones or even learning how to gift stock (both popular long-term presents or donations).
Kids can pick a charity, organization or even someone they know who needs a little help from a friend or neighbor. Eventually, they’ll begin to develop a sense of fulfillment because giving doesn’t just help the recipient, but the giver as well.
How to Teach Teenagers About Money
9. Teach Them About Contentment
Social media has become an almost unavoidable mainstay of our lives. This is only more true for teens who live their entire lives through the screens of their phones.
When they log into social media, they see highlight reels of friends, direct messages with pictures of a fun trip, or even complete strangers doing something extreme or intriguing. As your teens see this, they likely fall prey to one of the biggest enemies to self-confidence: the comparison trap.
You’re bound to hear things like:
“Dad, John’s parents bought him a brand new car! What’s with the 1998 Honda C-RV I have?”
“Mom, this girl from school just got a 3-week European trip for her 16th birthday. Can’t I have that too?”
To fight this jealousy, we need to focus on contentment for what we have. Contentment starts in the heart and letting your teen know what they have and what you can afford are good enough to get you the things you need in life.
And truthfully, not everything memorable in life requires spending a lot of money. The most precious moments happen whether you schedule them or not and often don’t involve a bulleted list of action items for a party coordinator.
Try focusing them on what they have and what their lives are better off for it.
10. Give Them Responsibility Over a Bank Account
Apps like Greenlight Card that give you control over their spending, provide you real-time notifications of purchases they make and even allow you to block specific merchants online and off from using their debit card.
Plus, they can even start investing in kid-friendly stocks through the app’s investing service.
These all-in-one financial apps start with small balances now but might help them manage their money when they leave home and have paychecks of their own!
Parents can help kids open these accounts.
11. Get Them to Save for College
The biggest investment they might make in themselves is by going to college. If you’d like them to avoid student loans and also to learn financial responsibility, you might encourage them to start saving for college now.
This doesn’t mean they pay for it entirely by themselves, but they will need some extra spending money while in college (and even to pay some of their tuition and fees)!
If they plan to work during the summer, have them set aside a portion of that (or more) and toss it into a college savings account through a company like Backer.
Your teens will feel like they are a contributing member of the household when they contribute toward their future education.
12. Teach Them to Avoid Student Loans
To pay for your child’s future college tuition, you need to have the “how are we going to pay for this” talk. When you talk, let them know student loans aren’t a foregone conclusion nor a cost of attending college. They have other options available to avoid going into costly student loan debt.
That can mean attending a community college for a couple years to get core credits taken care of for a far lower price than a private or out-of-state university. Further, they can choose an in-state university and work part-time before attending and while at school.
Plus, they can get a leg up by applying to scholarships now, volunteering with organizations that offer them to members, or beginning to network with companies or foundations that offer scholarships.
Let your teen know that student loans aren’t an option to fund their education. Talk through all the alternatives out there, like going to community college, going to an in-state university, working part-time while in school, and applying for scholarships now.
13. Teach Them the Dangers of Credit Cards
When your kid reaches the age of majority in your state, you can expect your mailbox to get stuffed with credit card sign up offers.
This only holds more true if they’re headed to college and need to have their own spending money and line of credit. Or so the thinking goes.
Take this opportunity to head off these enticing offers by having a discussion about why credit card debit is a bad idea.
People can quickly get behind with credit cards because they think the line of credit can get them things they’ve always wanted right now. They can just repay the cost down line.
Few ever pay attention to the cost of this decision: considerable interest rates that compound against you.
14. Teach Them How to Budget
This doesn’t mean setting up a multiple tab Excel spreadsheet nor over complicating how they manage their money. Using a simple tool to help them with budgeting, managing their money and investing it.
You can start teaching your teen the basics of budgeting at any time, but now is better than never. The earlier a child learns effective money management strategies, the greater success they will have in life.
15. Introduce Them to the Magic of Compound Interest
Do teens care about such a thing? You might be surprised how exciting teens can get when it comes to different topics. Becoming investment smart isn’t uncool.
The sooner your teens start investing, the better. Compound interest is an excellent way to learn about the work that goes into money management, and how rewarding it can be. You can see your efforts grow with time and eventually see them grow off one another.
Teaching your child about money management and investing at an early age will help them see the benefits and pitfalls as they grow into their adult life. Consider investing with an app like Greenlight.
You can pair this with an investing book for teens to teach them how compounding returns work.
16. Help Them Figure Out How to Make Money
Teens and young adults tend to have time on their hands that parents just don’t. They’ve got built-in breaks from school, flexible class schedules and summer vacation.
These are all opportunities to earn some money by finding a job. Help your teen find a job and earn their own money.
About the Site Author and Blog
In 2018, I was winding down a stint in investor relations and found myself newly equipped with a CPA, added insight on how investors behave in markets, and a load of free time. My job routinely required extended work hours, complex assignments, and tight deadlines. Seeking to maintain my momentum, I wanted to chase something ambitious.
I chose to start this financial independence blog as my next step, recognizing both the challenge and opportunity. I launched the site with encouragement from my wife as a means to lay out our financial independence journey and connect with and help others who share the same goal.
I have not been compensated by any of the companies listed in this post at the time of this writing. Any recommendations made by me are my own. Should you choose to act on them, please see the disclaimer on my About Young and the Invested page.