6 Reasons to Talk to Your Kids About Money

Hi everyone! Welcome back to Melissa Making Cents!

As many of you know, I am not only a financial planner; I’m also a parent! I care a lot about teaching children about finances from an early age, and I frequently have money-related conversations with my daughter. Most schools don’t teach a formal class on personal finance, which leaves most forms of financial education up to the parents or to the child’s own experiences. And if you’ve never talked about money with your children before, or if you didn’t talk about money with your own parents while you were growing up, this can be really intimidating!

I’ve heard some people suggest that kids don’t need to learn about personal finance until their teen years, such as when they get their first part-time job or start looking at colleges. In fact, children as young as two or three can benefit from starting to learn about money. If you’re still on the fence about whether or not to teach your child about finances, take a look at these six reasons why you should.

I'd like to make one last point before I start. Money is more than simply income and expenses.  Money is also about personal values, and using your finances to accomplish personal goals and beliefs. For instance, you may value charity or tithing to a church. To accomplish your goals in gifting, your would make tithing a part of your financial plan and monthly budget.  If you are not talking to your children about money, they will no doubt pick up the topic from someone else.  Take a second to think about your money values and how they might differ from others.

1 - Kids learn by example.

Not long ago, I was in a grocery store and witnessed a kid grab a candy bar and stick it on the counter. The mom yelled at the kid and put the candy bar back, only to grab a king size candy for herself. I thought to myself: what is that experience teaching the child about money? Is the child learning that parents can spend money on whatever they want for themselves, but not for their children? Or that it’s okay to buy a candy bar, but only if you get the BIG one? 

The key here is that kids will learn the most about finances by watching what their parents do. If kids see their parents ordering a lot of stuff online or eating at a restaurant almost every day--without explaining how it fits into the family budget or providing more financial context--they may normalize that behavior without understanding the financial implications behind it. They may think that money doesn’t matter because you can just buy whatever you want, whenever you want. Similarly, if kids observe that their parents always buy new things--a new car every few years, new clothes every season, the latest smartphone, etc.--they may assume those things are important without understanding that they come with a price tag. 

By contrast, if children watch their parents talk openly about money, use a savings jar for a “vacation fund,” shop with a dedicated budget, and say “no” to an expense with a justification that it’s not in their budget for the month, they may develop a more in-depth view of finances. Parents who explain their financial decisions to kids can be positive role models. The point isn’t necessarily about how much the parents spend or what they spend it on; it’s more about kids understanding the whole financial picture. Remember, they’re always watching!

2 - Being honest with money helps kids set realistic expectations.

As parents, we often find ourselves saying “no” to buying things for our kids. “No” to that new iPad, “no” to that toy that’s been on all the TV commercials, “no” to that expensive video game console. We don’t want to hurt our kids’ feelings if we can afford something they want, but being honest about money teaches them to set realistic expectations and work hard for what they want. 

Parents shouldn’t go so far as to foster a “scarcity mindset” in children, but can still frame finances as a series of educated decisions based on the (limited) resources available. Even if parents are able to afford whatever the child wants, it’s a good idea to show how one financial decision impacts other financial decisions. For example, maybe going to an ice cream shop today means that the family won’t be able to go to the movies tomorrow. Or sending the kids to summer camp means forgoing a family vacation. Or maybe that video game isn’t in the budget right now, but could be in the budget as a holiday or birthday gift. Another benefit of being honest about money in this manner is that a child is less likely to feel punished when a parent says “no” to buying something because it’s discussed in the broader context of the family’s finances. 

3 - Teaching basic financial skills like budgeting instills good habits for the future.

Has your kid ever wondered why math is important? Or on the other hand, does your child LOVE math and get excited about calculating your change whenever you pay for something in cash? Well, budgeting is a personal finance and a math lesson all in one--and it’s one of the most useful lifetime habits to learn. 

Children can be involved in the family budgeting and financial planning process, even at a young age. Parents can start small by involving kids in the budget for a family vacation, or letting them listen to parental discussions about the “wants” portion of the monthly budget. For example, if the kids know that the parents have allocated $200 for “family fun” that month, the kids can think of their own ideas for how the family should budget that money--going to the movies, heading to the zoo, or picking up some new board games to play at home. Kids can also learn more details about allocating money toward “needs” and “savings” to get a more holistic view of how the family budget works.

I’m also a huge advocate of letting kids earn an allowance--no matter how small--for making contributions to the household. While children are probably expected to do some chores anyway, I believe there is merit for children to take on additional responsibilities in order to earn an allowance. An allowance helps to teach kids about the value of work--and that money needs to be earned, not just given. If a child learns that they must perform a chore for 30 minutes in order to earn their $5 allowance, they will likely think very carefully about how they want to spend it! Furthermore, parents can help their children with budgeting the allowance money. I recommend trying some variation of the 50/30/20 budgeting rule with children, in which a certain percentage goes into savings (such as a college fund), another percentage goes toward “wants,” and another percentage goes toward “needs.” This helps children learn the importance of saving, too, rather than spending everything they earn. Parents may even encourage their kids to set a certain percentage of the allowance aside for donations or charitable giving (bonus if parents are willing to match the child’s donation!). 

4 - Teaching children about credit can help them avoid debt problems.

Think about how many times your child has seen you use a credit card. Now think about how many times they’ve seen your credit card bill. There’s probably a big difference in those numbers! 

Not surprisingly, many kids may not understand credit cards. Because they don’t see actual money being exchanged (or the statement at the end of the month), they may not understand how much is being spent. They may not understand the importance of paying off a credit card bill, what interest is, or what it means to carry a balance over time. The last thing you want to happen is for your child to get their first credit card and max it out (or miss a payment) because they don’t understand how budgets, credit, and debt repayment work!  

Parents should teach kids that a credit card is not a magic tool that lets you buy things without paying it off. Credit cards come with credit limits, interest rates, and payment deadlines that all affect how they can and should be used. There are also much deeper implications for using credit cards, such as how they affect a person’s credit score (which in turn affects the ability to get a loan for college, a car, a house, and any other major purchase). While very young children may not need to know all these details right away, they should understand that credit is about “borrowing,” not “buying.” And just because mommy and daddy fill up the car at a gas station by swiping a credit card, that doesn’t mean the gas is free!

5 - Having money conversations prepares kids for college planning.

Talking about money and setting realistic expectations also helps when eventually looking at colleges. As a college planning and student loan advisor, I’ve met with a lot of families with high school students who don’t really understand how loans work. Kids might hear that a loan will carry a certain percentage of interest, but they don’t know exactly what that means in terms of how long they will be paying it off, how debt repayment affects their quality of life, or how debt affects their parents if the parents are the ones taking out the loan. They often don’t understand the concept of “return on investment” either, which complicates financial decision-making.

If the kids are involved in conversations about finances early on, they will more likely understand the price tag for their education. By talking to kids not only about budgeting and saving but also about debt and interest rates, they will have a clearer picture of how college could affect the parents’ retirement and other finances, as well as their own. In fact, children who have a healthy relationship with money and understand the impact of finances on the family may feel incentivized to apply for scholarships, attend a community college for their first few years, live at home, or work part-time during their teenage years to help with the cost of their education. With student loan levels reaching unprecedented heights, this is another reason why talking to your kids about money--and especially comprehensive college planning--is more important than ever. 

6 - Empowering kids to be in control of their money makes everyone feel good!

Perhaps the best reason for talking to kids about money is to ensure peace of mind when they become adults. By teaching kids about finances early on, they will likely make good financial decisions in the future.  Parents won’t need to worry as much about the kids when they go to college, and the kids will feel more equipped to handle their own money. Kids will understand that money needs to be earned through hard work, as well as budgeted and saved so that it meets their short-term and long-term goals. By talking with parents about money early on, kids may also feel less of a temptation to “keep up with the Joneses” at school or work. And ultimately, both the parents and kids will feel more confident about their relationship with money. 

A financial planner can help you create goals for the entire family.

As a CERTIFIED FINANCIAL PLANNER™, I work with families of all backgrounds, sizes, and income levels to develop financial plans that meet the needs of parents and children. I always encourage my clients to get the kids involved in the financial planning process as early as possible--and most of them find it a lot of fun! For more ideas for introducing kids to personal finance, watch my recent webinar “Helping Your Kids Make Cents of Money.”  If you need some guidance in creating a financial plan for your family, please call or email to schedule an appointment with me.

Until next time...this is Melissa Making Cents!

Melissa Anne Cox CERTIFIED FINANCIAL PLANNER™ is also a College Planning and Student Loan Advisor, and Financial Coach in Dallas, Texas.