Teaching Children About Money

Teaching children the value of money and financial responsibility is one of the most practical and important lessons children can learn.  Our consumption-driven society has never been more fiscally irresponsible.  In 2006, the savings rate was a negative 1 percent!  So on average, people not only spent every dollar they made, but also had to either go into debt or draw on their savings to spend even more.  There hasn’t been a savings rate this low since the Great Depression.  Of course, during the Great Depression, the unemployment rate was at 25% - today it’s less than 5%.  Back then, people were forced to spend more than they earned just to take care of their basic necessities.  Today people don’t think twice about spending money they don’t have just because they feel they “deserve” it.  Our children are surrounded by this out-of-control consumer culture and so the earlier they learn about fiscal responsibility, the better off they will be.

The best method for raising financially responsible children is for the parents to be financially responsible themselves.  You cannot teach your children what they should do if you yourself don’t do it. You first have to get your own financial house in order.  Children don't do as you say - they do as you do. They study your every move, and unfortunately, plenty of parents pass on some very damaging financial practices.

Children who watch their parents ring up huge credit card bills buying luxury items and taking vacations they can't afford tend to dig the same financial holes themselves as adults. A child who sees bills pile up unpaid is getting a damaging lesson in managing money - one they may struggle all their lives to overcome.

Another way you can ruin your child’s financial future is by spoiling them.  Many people seem to have convinced themselves that showering their kids with everything they want is good parenting. They lose the ability to say no to anything their child asks for. Then when that child gets out in the real world on a low starting salary, they have no sense at all of financial restraint.  They still expect to be able to have everything right now. Of course, credit card companies are happy to assist them in getting what they want right away.  It doesn’t take long for a child who has been spoiled their whole life to find themselves buried in $5,000-$10,000 of credit card debt.

Along those same lines, you shouldn’t buy your children something every time you take them with you to the store.  It’s not a matter of being able to afford to buy them something, but rather an opportunity to teach financial restraint.  Buying toys and gifts for your children should be reserved for special occasions (e.g. Birthday, Christmas, etc.). If you simply buy everything your children wants, you are not only taking away the "specialness" of gifts, you are setting up your kid to be a financial wreck. The children who get everything they want when they’re young end up struggling with debt the rest of their lives -- simply because they were never taught moderation and living within one's means.

Of course, parents can also teach their children bad financial habits by spoiling themselves as well.  Very few families seem to know how to live within their means.  They seem oblivious to the risks of spending more than they earn.  In fact, they seem more concerned about the perceived shame that might come if they tried living within their means. Keeping up with the Joneses has never before been so pervasive in our culture.  It’s impossible for you to teach your children how to handle peer pressure if you can’t resist it yourself.  Spending money just to impress someone sends the wrong message to your children.

Of course learning how to manage money is something children have to learn by experience. Giving children a lecture about how to handle money is not enough. Children need to learn and experience it.

One great way to teach your children about earning and managing money is by giving them a regular allowance. This gives children first-hand experience in learning how to manage money and appreciate the value of their hard-earned dollars. 

In addition, having an allowance will help children set financial goals and learn how to live on a fixed-income/budget.  It will require them to make choices about what they will spend their money on.  They will have to learn to balance what they have with what they want.  They also learn that everything has a cost associated with it.  Just because it’s advertised on television doesn’t mean that you can afford it.

Of course a child shouldn’t be paid for every little thing they do around the house.  Each child should have regular household chores that they are required to do because they are a contributing part of the family.  Then there should also be additional tasks and responsibilities for which they are paid an allowance. These tasks provide children with an introduction to the notions of work and receiving payment for the level and quality of the work they do.  An important part of giving an allowance is that your children learn that if they don't do the work and just as importantly, if they don’t do quality work - they don't get paid.

Allowances can also be useful tools for teaching your children about other values. For example, teaching them that the first 10% of what they receive belongs to the Lord.  Requiring them to deposit a certain amount each month in a savings account teaches them about frugality and long-term planning. Helping them to decide whether to wait to buy something later rather than right away shows them about the value of patience and delayed gratification. An essential part of becoming a responsible person is learning to delay gratification. Yet popular culture encourages - and profits from - people seeking immediate gratification. Teaching children to delay gratification, through the use of allowances, will make them more resistant to the messages of "Gotta have it now!" with which popular culture bombards them, and will help them grow up to be financially responsible adults.

How much you decide to give as an allowance will depend upon your individual financial situation and the age of the child.  It shouldn’t be such a large amount that they are never required to make any tough financial decisions and it shouldn’t be so little that it doesn’t allow them to practice financial responsibility.  As the child gets older, the amount you give should increase.

It’s important that children learn that money does not “grow on trees”. Just because you have checks in your checkbook or credit cards in your wallet does not mean you have money to spend.  An essential part of fiscal responsibility is learning to live within one's budget.  Your children have to learn how to respect money and use it properly.  Money is not just a means of buying popularity or happiness.  The most important lesson you can teach your children about money has nothing to do with how much you can get, but rather how to use what you do have.