According to the USDA’s latest calculations, a middle class American family will spend about $233,610 raising a child born in 2015 to age 18. And that doesn’t count college. Personally, I think these figures are a bit overblown. But the bottom line is that kids are expensive.
So we parents are worrying about where we’re going to get all the money for the children’s expenses and how we’re going to spend it. But in the hustle of everyday parenthood, we often forget to teach them where to get money and how to spend it wisely.
Studies show we’re basically failing at this goal — miserably. Get a load of these statistics from recent studies:
- A T. Rowe Price survey showed 13 percent of parents never talk about money with their kids, while 30 percent talked to them about money one time a month or less.
- Only 15 percent of parents surveyed actually set aside specific time to talk to their kids about money.
- Another study showed that most parents consider some money topics, like family finances, parental income, investments, and debt, “off limits.”
- One survey from 2011 showed that nearly 60 of parents were helping their adult children financially. This number seems to be lower as the job market has improved. But it’s still fairly common for adults to move back home or rely on the Bank of Mom and Dad.
Clearly, we could do better. And we need to do better. Teaching kids about money should be right up there with teaching them to cook, clean, and do their own laundry before they graduate high school! Managing money well is simply an essential life skill that your kids won’t just pick up by accident.
Of course, that brings us to the hard part: the how.
How do we go about teaching kids about money? There are all sorts of opinions out there on this. But I’m going to try to boil it down to a few basics.
Let Them Practice
Here’s what I think is the primary thing parents miss the mark on: we don’t expect kids to practice with money.
We know they need to practice all these other skills we want them to learn. We’d never turn a 16-year-old loose with our car without taking them for lots of supervised driving time first.
But many of our kids never have an opportunity to practice substantially with money. Sure, they might get a few bucks from Grandma for their birthday. Or get a little allowance here or there. But what you really need is a thought-out system for giving kids the chance to manage money.
Of course, for them to practice with money, they need to actually have money. Luckily, there are a couple of different options in this space.
Option 1: Commission-Style Allowances
This option has been popularized by Dave Ramsey. It posits that kids should be expected to do basic chores just because they’re a member of the household. You don’t get paid just for existing, so why should your kids?
So instead of a set allowance kids get paid a certain amount of money to do particular chores. Each chore has a value. When they do that chore, they get the money for it. Then, they can do what they want with that money, within whatever limits you set.
This option is good for older kids, I think, who want to earn above and beyond what you’re willing to just hand over to them. However, it has its weaknesses. For instance, what if kids don’t have anything on their wish list? They’ll just stop doing extra chores because they don’t need money.
Option 2: A Set Allowance
This is an option I’ve read about elsewhere, but the book The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous, and Smart About Money by Ron Lieber really solidified it for me.
Lieber argues that kids should get an allowance basically for just being a part of the family. They should get enough money to make decisions that feel fairly high-stakes to them.
The advantage of this option is that kids can practice earlier and more often with money. Also, since you’re just handing your kids money, you can reasonably expect to have a little more control. Lieber suggests having kids split the money into spending, saving, and giving categories. (To be fair, Dave Ramsey also advocates a similar approach here.)
But with this higher allowance comes higher expectations. For instance, you might just stop buying your five-year-old toys or treats at all outside of birthdays and holidays. She’ll have to use her own money when she wants something, which is an incredibly valuable lesson.
As kids age, the expectations can increase. A middle-schooler should be able to manage his or her own back-to-school clothing budget. And a high-schooler should be paying for his smartphone, for instance.
Practice Makes Perfect
You can probably tell which way I lean on this issue. I really prefer Lieber’s style of allowances because it does give kids higher expectations and more consistent opportunities to practice.
In fact, I’ve already seen this play out with my kindergartener. She gets $6 per week in allowance, split evenly between spending, saving, and giving. Watching her figure out how to spend — or not spend — that spending money is enlightening, to say the least.
Regardless of which method you choose, though, the bottom line is that your kids need to practice with money. And they need to practice now, when the stakes are relatively low. This type of practice helps kids start defining wants versus needs, make spending choices, and learn the power of savings.
Sure, blowing the back-to-school budget on a single pair of jeans means your kid will scramble for decent shirts to wear to school. Truly, not that big a deal. But when it’s 21-year-old making $100,000 decisions about which college to attend, she doesn’t have as much room for error.
Be Open and Honest
You’ve probably experienced the power of kids’ truth telling as a parent. If you haven’t, your kid probably isn’t talking yet.
Kids are incredibly perceptive and able to see through our most sophisticated untruths. Sometimes it’s easier to tell a half-truth. But it’s usually not a good idea. Nowhere is this truer than with our finances.
When your kid is with you at the store asking for yet another new toy, what’s your answer? If it’s something like, “We don’t have the money for that right now,” is that really true? In many cases, it’s not.
The bottom line here is that it’s better to be clear with your kids about the reasoning behind your financial choices. For instance, maybe that particular toy doesn’t fit well within your family’s value system. Or maybe you prefer to save extra money for travel versus buying more toys. Or maybe you’re just overwhelmed with the clutter already and know your kids don’t need more toys.
Whatever your reasoning, say it, and stick with it. Unless you’re honest with your kids about your financial choices, they won’t know the why of money management.
This honest can and should expand as children get older. Sure, it might feel uncomfortable to have conversations about investments, debt, and the family budget. But if you don’t have these conversations, your kids will be left to just figure it out as they go along. Not a good thing!
Save Early and Often
Perhaps one of the best things we can use to teach kids about money is saving and the power of compound interest.
Compound interest is a concept even many adults don’t understand. But it’s one of the most powerful financial forces out there.
You can start teaching kids about compound interest as soon as they’re old enough to save money in a jar. For instance, when you dole out allowance every week, you could give your kid a nickel for every dollar that’s still in their jar. They’ll pretty quickly see that it doesn’t take long for the nickels to make another dollar, which earns even more nickels.
Once kids are a bit older, though, it may be best to leave this lesson to the bank. Have kids open a savings account, and regularly put money away. Then, help them calculate how the interest will grow over time.
Bank interest not high enough for you? Help kids buy bonds or a CD. These are great options for mid-term savings. They could be especially helpful when kids are old enough to start thinking of saving for a car. That extra money from interest will come in handy when it’s time to start car shopping!
Keep Sharing What You’re Learning
You may have landed on a personal finance site like this one because you’re still learning about money management. That’s great. There’s always more to learn! So start sharing what you’ve learned with your kids. Even young kids can understand that you’re never too old to learn more about how best to make your money work for you!