Talking to Kids About Money

From starting a piggy bank to sending your kid off to college with a credit card, helping kids learn healthy habits around money can take a lot of work — and patience.

But teaching children to be financially responsible early on will help them cope with challenges like setting limits, planning a budget and resisting impulse buys. There are a lot of different ways to help kids get smart about spending, but we’ve put together some basics to help parents get started.

Although it’s never too late to develop good money habits, starting the conversation when children are young will make things easier down the line when the stakes are higher. David Anderson, PhD, a clinical psychologist at the Child Mind Institute, suggests beginning to talk about money when your child is in second or third grade. “That’s when most kids’ math skills get to the point where they’re able to understand this kind of arithmetic.”

Talking comfortably about finances is an important part of helping kids developing a healthy relationship with money. “Talking about money can’t be relegated to a one-time conversation,” advises Lynne Somerman, a money coach and founder of The Wiser Miser. “It needs to be part of the day-in, day-out conversation. As money topics come up and your kids are around, talk about them as openly as you feel comfortable.”

One way to do this is by including your children in basic financial decisions. For example, at the supermarket you can look at the circular together to see what’s on sale before deciding what to make for dinner. Or you can ask them to make budget-based decisions, like they can have one pair of more expensive shoes or two pairs of cheaper ones because you have only budgeted so much for shoes.

You can also start the conversation about why some things cost more money. Ask your kids to help you compare prices and examine product claims. Is it essentially the same product but more expensive because it is a name brand? Or are their other factors that might justify a higher price, like better workmanship or more humane farming practices?

Kids look to parents for cues on how to behave — and money management is no exception. A big part of teaching kids good financial habits is making sure you’re modeling them yourself. Let your child know what the expectations and norms around money in your family are by setting easy-to-follow examples. A few things to try could be:

• Setting a budget before heading to the store, and sticking to it when you shop, even if that means leaving a treat behind.
• Being open about saving money for things like vacations, a new car, college funds and retirement.
• Teaching kids to fix things when they break, instead of throwing them away.
• Avoiding “retail therapy,” or shopping with the goal of cheering yourself up.
• Imposing a waiting period to guard against impulsive purchases. Are you still thinking about that pair of shoes a week later?

When parents model good behaviors early on, kids get the message that being smart about money is part of growing up, says Dr. Anderson, “and limits become something that follow much more easily.”

One of the most common ways to introduce kids to the idea of responsible spending is by giving them an allowance. How much you give is up to you, but any amount can be a great way to teach kids money basics.

The first thing to think about, says Dr. Anderson, is “what behavior should be tied to receiving that money.” Of course there are times, like a birthday or holiday, when a child may get money as a present, but an allowance should be seen more like a paycheck —something earned rather than a weekly gift. These expectations, whether they are tied to academic achievement or chores, should be clearly laid out and discussed.

The next thing to think about when it comes to allowance is how they will spend their money. This is where parents can begin to introduce lessons about budgeting, saving, impulse control and delayed gratification.

One way to do this is to start by creating a savings account. “We’ll often encourage parents to pay kids a certain amount of their allowance in cash for spending, and a certain amount that’s not flexible that goes into their savings,” says Dr. Anderson. Start by agreeing on a savings plan with your child, and have a conversation about what they’d like to save up for. A few ideas could be:

• A trip to their favorite amusement park
• An upcoming movie they’ve been looking forward to seeing
• A toy, game or item of clothing they want (but don’t need).

Once your child has saved up enough money to meet their goal, Dr. Anderson suggests giving them the chance to decide if they’d like to use it, or keep saving. That way, he says, “Kids can decide when to dip into their savings and when something is meaningful or valuable enough that they want to spend some of the money they’ve saved.”

Another tactic that has become increasingly popular is to break down the child’s money into three categories: spending, saving and donating. This not only gets children to think about budgeting and delayed gratification, but also teaches them to “think about their place in the larger world,” says Dr. Anderson. Deciding what causes to donate to can be a valuable family conversation.

Somerman agrees. “Talk about income inequality and poverty, too, as examples come up in your life or on TV,” she suggests. Understanding that not everyone has the same amount of money — and the same access to things money can buy, like food, toys, clothes or even a comfortable home — will help kids get a better sense of what’s really important.

For older kids, parents can maintain this strategy while introducing greater independence into their decision-making. Somerman recommends something like a simple envelope system. Parents should sit down with their child to decide what they are expected to pay for with their allowance, then break those things down and put the budgeted money into specific envelopes. Categories might include clothing, transportation and general “fun money.” Whatever they don’t spend gets rolled over to the next month; likewise, if they didn’t budget enough for, say, gas, it might have to come out of fun money. Seeing the money in the envelopes (and especially watching it disappear) can make spending seem a lot more “real,” especially compared to paying for things with a debit card.

If there are some things in the budget that aren’t flexible — like saving for college — then that money might bypass the envelope system and go straight into a savings account.

If your child has ADHD, managing money can be a particular challenge.  “Some of the major behaviors that we see with kids with ADHD,” explains Dr. Anderson, “involve not being able to delay gratification, not considering the downstream consequences of a decision and prioritizing perhaps a small initial reward over a larger one that might happen later.” These can all lead to poor financial decision-making.

Another potential hurdle is that, because there is a genetic component to ADHD, parents of children with ADHD often have the disorder themselves. It can be particularly challenging for parents who struggle with executive functions or organization to teach kids good financial habits, especially if the parent doesn’t feel that they have mastery over their own finances. “That’s where a good therapist or mental health person can help,” says Dr. Anderson.  Working with a professional can help struggling parents improve their own money habits, and make it easier to pass those skills along.

At the end of the day, one of the hardest parts about teaching kids about money is that they will inevitably make mistakes, and those misjudgments result in real, tangible financial loss. However, it’s important to give kids room to test out certain behaviors and learn from the consequences.

When the child makes a mistake, especially an expensive one, it can be tempting to take away all responsibility and privilege forever. But keep in mind that it may take some trial and error (and patience on your part) for kids to learn good habits. “The reality is,” argues Dr. Anderson, “we still have to figure out how to help them practice those responsible behaviors at some point, or else they will never learn them.”