Updated January 16, 2020

7 Money Lessons to Teach Your Kids

Budgeting

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Kids are like little sponges. When exposed to something new, they soak it in and add it to their store of knowledge. It’s how they learn about the world around them.

While schools teach traditional subjects like math, science, and history, they often leave out money lessons. Kids are left to learn about money through trial and error, and by observing the people in their lives…like you.

As a parent, you want to give your kids the tools and know-how to be successful in life. Teaching them how to manage their money is vital, and you can never start too early.

I’m not saying a five-year-old needs to understand how a 401(k) plan works or the advantages of investing in index funds. That stuff can wait until they’re older.

But there are some money lessons you’ll want to teach your kids while they’re still young.

Below are five money lessons we think are particularly important and some real-life examples of how we teach our own kids.

1. There’s a Difference Between Needs and Wants

Children have trouble understanding the difference between needs and wants. Heck, lots of adults never learn that lesson!

Just to be clear, needs are things you can’t live without, such as food, water, clothes, and a roof over your head.

Wants are pretty much everything else.

You need a pair of sneakers to protect your feet outside. You want a pair of Air Jordans that will make all your friends jealous.

Kids don’t see the difference. They “need” everything. This can be frustrating for parents on a tight budget, especially when kids’ friends or classmates seem to get anything they want.

One strategy you can use to teach your kids the difference between needs and wants is to correct them when they confuse the two.

When your daughter says she “needs” the new American Girl doll, gently correct her word choice.

It’s also important to set a good example. If you treat everything as a need, you can bet your kids will feel the same.

How We Teach the Lesson at Home

I’m dying to get a new charcoal smoker so I can step up my outdoor cooking skills. But when I mention it around the kids, I’m always careful to say I “want” a new smoker or that I’d love to have one. I never say I “need” it, because I don’t.

It may seem silly, but choosing your words carefully can send an effective message about your family’s values and teach your children a valuable lesson.

2. How to Earn Money

Kids might get free money as an allowance or in a birthday card from their grandma, but once you’re a grown up, the handouts stop.

It’s important for kids to understand they won’t just be given money for no reason and that they’ll need to do something to earn it for themselves. If nothing else, this will give them an appreciation of why you march off to work every day instead of binging on “The Office” reruns.

How We Teach the Lesson at Home

In addition to their regular allowance, we give our kids the opportunity to earn extra money by doing extra jobs around the house. We don’t pay them for standard chores like setting the dinner table or feeding the pets. Those chores come with being part of our family, so we expect the kids to help out with them.

But when I wanted to build a raised garden in the backyard or needed all the flower beds weeded, I offered them extra cash to help, because those chores are above and beyond what we’d normally expect.

As they’re getting older (currently ages 15, 13, and 10) we’re introducing them to other ways they can make money as a kid. Our oldest has already landed herself a few babysitting gigs and works a few hours each Sunday in the fall as a soccer referee. And my son is already talking about launching his own sports website someday!

3. The Magic of Compound interest

Compound interest allows your money to grow exponentially over time, and it can be pretty powerful. A quote often attributed to Albert Einstein even calls it “the eighth wonder of the world.”

For example, let’s say you invest $1,000 and earn 10% interest — $100 — on your investment. At the end of the first year you would have $1,100.

The following year you again earn 10% interest, except this time you don’t just earn interest on your original $1,000. You also earn interest on the $100 you had previously earned. The total interest you earn on the $1,100 is $110, leaving you with $1,210. On and on the cycle goes, and each time you earn more interest than the last. This is why it’s so useful to start saving early!

Check out the easy-to-use compound interest calculator by the U.S. Securities and Exchange Commission. You can adjust the amounts and interest rates and instantly see how your future savings will be affected.

Compound interest also has a dark side. If you fall into debt, it will be the creditors enjoying all of the interest you’re paying.

How We Teach the Lesson at Home

We set up online bank accounts for each of our kids when they were very young. Cash gifts for birthdays, Christmas, and other occasions went straight to their savings accounts. Even today we encourage good habits by designating a portion of their allowance to their savings.

We regularly log into Capital One 360 so they can view their account balance and history. They especially love to see the monthly interest payment increase each month.

4. Money Doesn’t Grow on Trees

As adults, we understand money is a finite resource and we can’t just print more $20 bills whenever we need them. Kids need to learn life is all about choices and every dollar spent comes with an opportunity cost. That dollar could have been used to purchase something else or put into savings to grow.

In other words, you can’t always get what you want, and you have to prioritize what is most important to you.

How We Teach the Lesson at Home

We try to teach this lesson by example day in and day out. At the grocery store, we can’t go down a single aisle without the kids seeing something they want. That’s a perfect opportunity to explain that we only have so much money to spend on food, so we have to make choices. We can get either ice cream or brownies for a treat, but not both.

The lesson really hits home when you let the kids make some of these decisions themselves. Learning to make small decisions about ice cream and brownies will help them be more comfortable making bigger decisions as they get older.

They’ll also learn to prioritize their spending and focus on the things that are really important to them. It’s tremendously rewarding when you see one of your kids decide not to buy a cheap toy at the dollar store because they would rather save up for a new video game.

If your kids really want something that doesn’t fit in the budget, challenge them to find ways to reduce family expenses to free up money.

For example, let’s say your kids are begging to go to Disney World but you can’t afford it right now.

Instead of just saying “no,” set up a Disney Vacation fund, and challenge the family to come up with ways to pay for it. You’ll be amazed to see the whole family commit themselves to living stingy. Suddenly everyone will be turning off lights when they leave a room and throwing on a sweater instead of cranking up the heat.

5. How to Use Credit Cards Responsibly

Americans have an astounding $868 billion in credit card debt, according to a recent report from The Ascent. While the credit card companies appear to be getting rich, consumers are struggling just to make minimum debt payments.

Many people charge more than they can afford, carry a balance, or miss payments. Using your credit cards this way can lead you into a cycle of debt, and digging your way out may take years.

But credit cards aren’t necessarily evil. Used responsibly, they offer convenience, protection against fraud, and rewards such as cash back and frequent flyer miles. They also help you build a credit history, which is vital if you buy a home.

Teaching your kids to use credit cards the right way will save them a world of hurt.

How We Teach the Lesson at Home

Explaining how credit cards work is a good start. Kids need to understand that credit isn’t free. Just because you aren’t handing over cash at the store doesn’t mean you don’t have to pay.

We find it helpful to let the kids see us paying our bills and even look at the credit card statement. When they see a line item for the car tires bought at Costco or the dinner we enjoyed at Olive Garden and watch us pay the bill, they see for themselves where our money is going.

When they get a little older, we’ll let them use a prepaid card with a small amount of money added to it. This will let them practice managing their money and keeping track of how much they have left.

When the time comes for them to get credit cards of their own, they’ll be ready.

6. Don’t Worry About the Joneses

It’s so easy to be jealous when you see other people with things you don’t have and can’t afford. Your best friend is going on yet another tropical vacation. Your neighbor has a new BMW parked in her driveway.

It’s natural to be a little jealous. You’re only human, right?

But if you focus too much on other people’s possessions, you’ll only feel inadequate and unhappy with your own life. Besides, they might be up to their eyeballs in debt trying to pay for it all.

How We Teach the Lesson at Home

Setting a good example is important. If we’re constantly acting jealous of other people, they’ll feel that way, too.

We make sure our kids understand appearances can be deceiving and not to believe everything they see on social media. People only share their best moments on social media, and often those moments are deceiving.

Heck, even Britney Spears was once outed for sharing someone else’s photo as if it were her own.

7. Money Isn’t Everything

We saved the most important lesson for last. Although learning how to manage your money is important, kids should also understand money is just a means to an end. It can’t buy true happiness.

Hoarding cash at the expense of your family, friends, and fun will not lead to a fulfilling life. There are plenty of rich people who are absolutely miserable.

If money is all you care about, you may have a very lonely life.

How We Teach the Lesson at Home

We both work for a living and I have an online business that serves as another stream of income. We work hard to support our family and our goals. But we always make time for family.

We always spend dinner together in our house. It’s our time to talk about our day and share our highs and lows, the good, the bad, and the ugly. And laughs. Lots of laughs.

The kids all play sports, and we watch as many games as possible. Even if it is 35 degrees and we’re getting pelted with freezing rain, we’re there.

We make it clear in our words and actions that family always comes first.

The Bottom Line

Teaching your kids how to effectively manage their money is one of the best things you can do for them. By teaching them these seven money lessons, you’ll put them in a position where they can live happy and financially secure lives. And that’s a great gift to give your children.

Mike Collins

Mike Collins is a father of three and the founder of DadSense.co, a personal finance site dedicated to helping families get out of debt, increase their income, and take control of their finances.

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