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How To Teach Kids Good Money Saving Habits

If you would like to learn how to teach your kids the proper way to treat money in less than ten minutes - this post is for you. I aim to give you a general idea with few pointers that will help you in most common life situations.

General Concept

Kids must learn how to delay the gratitude in our spoiled world of credit cards and instant gratification! By teaching your kids to be patient, work for and manage their money from young age, you will not only teach them wise saving habits and value of the money, but patience and perseverance in life in general. You must teach them because our society or educational system won’t! It is your duty as a parent! Sometimes it might feel that your words fall on deaf ear, which is not true! Kids remember what they’ve been taught!

[Side note: The most important part of raising kids is to respect them. If you do, everything else will fall in place. Do not shove your orders down their throats without an explanation; they will surely have poor self-esteem later in life. Give them options! Ask for their opinion! Include them in the discussion and decision processes! Please remember that kids take the words literally. If you call them names or make a remark that you think is innocent ("you cannot do anything right") - you might scar them for life. A tip: when my son does something that irritates me, I imagine he is my boss at work and I try to use the language and the tone of voice I would use with my boss at work (it can be any personality that you respect and don't want to offend).]

Kids learn not by listening but by doing. Create real life situations that will give them hands-on experiences. Have you ever wondered why when we are young adults we refuse all good advice, even if we realize it is the right thing to do,  and instead we stubbornly do it our own way (most likely wrong)? Our personalities are already formed by then and if we didn’t live through and experienced a particular life situation before, we have no example in our memory bank and being young and impatient, most spring chickens will choose by default the easy (read – wrong) road.

Kids will not only remember what you teach them but what you do as well. If you are a compulsive shopper, they will see it – and if your message on prudent saving conflicts with your actions, the child will get confused. Be consistent.

If at any age child is fixated on some big item purchase, be it a gaming console, expensive remote controlled car model or $100 sneakers, don’t buy it straight away. For younger children, buy it for their birthdays or Christmas. Make older children (after 6 y.o.) participate by saving for part of the price. They can save part of their allowances and do one time jobs to earn towards it. In case of $100 sneakers, you can use a limit, let’s say $50 maximum on shoes and have the kid pay the rest. After saving diligently for it, child will rarely add more than $30-$40 and will learn not to buy latest overpriced fashion items. This example is taken from a great book “Raising Money Smart Kids” by Janet Bodnar.

Preschool Years

Your child is just born. It is a good idea to start a college fund at child’s birth. You can keep it secret and have a nice surprise for him or her when the time comes. Imagine your child develops real passion for something exotic and you will be able to send him or her to study in a prestigious university at home or abroad. Or you can make them aware of college fund when they are older and get them involved by having them to contribute small percentage of their allowance and/or chores money to the fund.

At what age to start teaching kids about money? At the age kids are able to grasp the money and related value concepts and start asking questions on the subject. This is usually around the age of 6-8 years. Normally, preschool kids cannot distinguish between the value of paper bills and coins and a $10 bill is the same for them as a $1 bill, so money allowance is out of question. At this age kids will happily spend whatever you give them.

Famous shopping tantrums, which parent does not dread them? Keep the children busy by asking them to help you and letting them choose between two kinds of the same product. Never give in and buy the item child demands. Praise and reward them for good behavior.

If child throws a tantrum, don’t react in anger and try to distract the child. Set the rule in advance of having only one small treat with a set maximum price and enforce it. You can collect all the treats child wants and in the end let them choose only one. This will keep them calm till the end.  There are no set rules on how to deal with tantrums and you should try different tactics to see which one works for you.

Age 7 to 12

When child understands the value of different coins and bills and what they can buy and he is old enough to manage it, weekly allowance should be started. This is usually started when child starts going to school. Sit down together and figure out how much weekly allowance to give and what purchases it will include or not. Movie tickets, video arcade games, birthday gifts for friends, school snacks and any other regular expenses should be considered.

Most child psychologists recommend that you don’t have your children do regular house chores for allowance money and I agree. Child should learn responsibility and make up his bed, clean his room, do the dishes, take out the garbage and do any other regular house chores without any monetary reward. Allowance should be tied to financial responsibility by assigning regular purchases to the allowance money and letting the child manage it without you micromanaging him or her. If your child needs extra money from time to time, you can invent a one-time house chore and pay for it. Never pay for regular work child is supposed to do around the house!

The same goes for school grades, do not tie allowance to it. The good method is to reward good grades with a gift, some privilege or verbal praise but not with money.

As for dollar amounts, it is hard to give uniform advice. Allowance should be slowly and gradually increased with age. No bailouts or loans are allowed! At the beginning the kids will surely blow their whole allowance a few times. If you keep firm and not give them extra money, they will learn how to pace their allowance for the duration of it.

As your children grow older, the allowance should increase and include more financial responsibilities, like school supplies and lunches, toiletries, cloth and whatever else you settled upon. The amount should be bigger than regular purchases, some money for saving, gifts and entertainment should be accounted in. Keeping a ledger is a great idea to help them see where the money is spent, but don’t micromanage them, let them figure it out on their own and only intervene when it is necessary. Set simple and tangible saving goals that are achievable in four to six week period. Longer than that is an eternity for kids.

It is also a good idea that the child starts and manages his own savings account around the same time the allowance starts. The principles described in the post How to Save Money: the Only Way That Works apply. Percentage of the money designated for saving has to be deducted first from allowance before anything else. The structure of the savings has to be easily understood by the child. For example, 70-20-10 rule: 70% for spending, 20% for the future big ticket items and 10% for long-term saving.

For example, you can discuss it with your kid and explain in detail what a retirement fund is and that the money cannot be touched until very old age (I think around 7-8 y.o. is the right age to explain this).  When your children are twenty years old and they have been doing it since eight years old, they most likely will keep the habit for the rest of their lives.

To give you a simple idea on power of time and compound interest, if child starts putting in savings account an average of $5 a month from the age of 7 to the age of 18 and then a $100 a month from 18 years old on, at a 6% annual interest and by reinvesting principal and the interest payments, at the age of 65 he or she will have around $330,000; and at a 10% interest the amount will be $1,422,000.

You can offer an incentive to save more by matching any extra-curriculum deposits. For example, if child didn’t spend $10 and wants to put it in his long term savings account, you could match it by $10.

Teens

As kids grow, their toys, hobbies, cloth and activities become more expensive as well. Their responsibilities should grow too. It might be a good idea to expand the allowance to cover all their expenses: clothing, lunches, gifts, hobbies, savings, etc. Usually kids earn substantial sums from jobs at this age as well. Managing all their expenses will give teenagers a sense of responsibility.

Now you can give them allowance monthly instead of weekly and include bigger priced items. For example, give them the amount of cash allocated for their clothing this season and let them buy it themselves. Explain upfront what items and in which quantity they should buy. If they spend all the money on one expensive jacket, then they will have to suffer the consequences and either earn extra cash or use it from their allowance money at the expense of entertainment to buy the necessary cloth. Do not let them use their savings for this.

If your teen son wants an expensive gaming console which is out of question, don’t deny it to him outright. You might compromise by contributing a $100 to it and by helping him with ideas on how to earn extra money to get it. Your son will appreciate it more and treat it with much more care. But the greatest lesson would be the prudence in spending.

When my son reaches teen years, I plan to teach him how to invest in stocks. I would like him to start a simple ledger where he can keep track of his income, savings and expenses by the age of eight. So when he is thirteen, he will have some savings already and we can start learning how to invest with real money.

Credit Cards – I think teenage kids shouldn’t have them. You must explain them though how credit cards work. I discuss credit card use in detail in a previous post here.

Part-time work is a double-edged sword. If grades start to suffer, it has to be stopped or hours have to be cut down. All the money earned should be treated in the same prudent way with savings and tracking of expenses. Two most child-suitable types of work are small family run retail businesses and babysitting. I can’t recommend work at fast food restaurants as this might instill bad eating habits.

College

The best credit card for college is no credit card. Allowance should be strictly in cash. If you applied the principles outlined earlier, by the time your kids are off to college, they would have solid money management skills and good saving habits.

Grandparents

The balance should be found between grandparents and their adult kids. By that I mean that grandparents should consult with parents first on big ticket presents. Small $5-$10 gifts are excluded as long as they comply with the house rules. Most often house rules are about food, for example, parents don’t eat chocolate because one of them is allergic to it or it is their belief is that chocolate is bad for you (this is just an example, it could be anything: Coca-Cola, greasy donuts, etc. – we all have our quirks). Grandparents should respect house rules.

Conclusion

Each child and family situation is unique. These rules are not written in stone and they should be adapted to your current situation. Remember, the best way children learn is by doing. By giving them responsibilities and by nurturing it without micromanaging, you will give your kids a big head start in life and the chances that they will have an enjoyable and financially secure life are much better.

If you would like to learn more, I recommend the book by Janet Bodnar, Raising Money Smart Kids, it stands out by head and shoulders over other two books I’ve read on the subject.  This book is filled with practical advice and with huge amount of real life examples for children of all ages and for any possible kind of situation that might arise.  Janet has been writing a column for Kiplinger on this topic for longer than two decades and she has raised three kids of her own whom she used as a testing ground for money education ideas (poor kids!).

Please do not hesitate to comment if your opinion is different or if you have a good real life story that teaches a good lesson.