How To Talk To Your Kids About Money

“Poor or rich, money is good to have.”

Leah Eliash Kaufman, my grandmother

 

Talking about money is often a taboo subject, especially among family members. However, it is important to be able to know how to talk to your kids about money at an early age, so that you may ingrain them with good financial habits.

We can teach them why we save money at an early age with props like a piggy bank and take them to grocery shopping to show them how to make purchases.  My earliest memories are going with my mother to make deposits at the bank.

Later on, Mom and Dad shared their values about money, saving more than spending so we had the money for the future. My mom was mostly frugal, particularly when we were experiencing difficult times. My friends came from modest means as well, but they always seemed to have more than me. They had the latest toys, trendy clothing, a new bicycle, and a new car later. We drove a used car that was in the shop a lot, and we rarely went on vacation because their housewares store was open six (and sometimes seven) days a week.

I worked with my parents after school, on weekends, and in summer. From the age of 12 until I got my first full-time job after completing college, I helped out my parents. It was a family obligation, and I was not paid but got a wealth of knowledge running a business.

 

Memorable Lessons Passed On

While I didn’t have a ton of material things, my parents did pass on life lessons about the importance of education, working hard, and giving back to the community. They also encouraged me to set up a bank savings account, invest in stocks, and pay more with cash. They never used credit cards, but encouraged me to have a card but to pay the full balance monthly. 

My mom was never able to go to high school though she wanted to be a lawyer. Circumstances prevented her from moving ahead. She was so savvy about money, investing, and running an ultimately successful business.

Are We Rich?

As a mom, I feel her influence, especially with my kids, now in their teens. When they were younger, one or both accompanied me to the college when I taught finance classes. That opened the door for my husband and me to have some early discussions about money with them.

I always asked my mother when I was a young child, and my kids have asked us, “Are we rich?”

According to Charles Schwab’s 2019 Modern Wealth Survey of Americans ages 21-75, you are wealthy if your net worth is $2.27 million.

However, the amount varied by generation:

Gen Z         $1.49 million

Millennials  $1.94 million

Gen X         $2.53 million

Boomer       $2.63 million

Those surveyed said that 72% based their definition of wealth on how they live, and 28% considered wealth on the dollar amount.

The average US household’s net worth is $692,000, skewed because the super-rich pull up the number. A more realistic number is the net worth of the median US household, which is $97,300.

The truth is the majority of Americans need help in better managing money with these statistics:

• Only 38% have an emergency fund
• 59%  live paycheck-to-paycheck
• 44% carry a credit card balance at medium to high teens interest rates
• On average, we spend almost $500 per month on nonessentials

For these reasons, we, as parents, have an essential role in fostering our children’s attitudes and adopting good financial habits. 

10 Ways How To Talk To Your Kids About Money

 

1. Start To Teach Them Early.

Conversations with your teens about anything sensitive can be awkward, especially about being fiscally responsible with money. According to a 2018 T. Rowe Price survey, 66% of parents are reluctant to discuss money matters with their children. Only 21% of the kids recall their parents speaking about money at least once a week.

Speaking to children about finances takes some of the mystique out of money for them at an early age. It is more comfortable for parents to talk about savings, giving them a head start in math. Explain how the bank holds money for people and explain how it lends money. This will begin a conversation about financial literacy, leading to developing money management skills.

I did take my kids at a too-early age to an ATM to take out money.  My daughter, Alex, got too excited and wanted to try pushing buttons to get some money. She also gave $10 to a friend in her pre-K class for being her friend. It was her tooth fairy money. Luckily, his mom tipped me off. We talked to her about how that money goes into the bank to grow into more money.

2. Wants versus Needs

As they got older, my kids became accustomed to asking for and expecting everything.

It is tough to teach “needs” and “wants” when your 8-year-old says that he needs a smartphone. His friends had one for a long time. We began to set money limits by giving money for after school for the whole week. They learn something about allocating more money for the days they have plans with friends.

Spending money is a neglected topic for many. When kids see us spending money on big-ticket items like a 65″ TV screen, I usually share my thoughts with them with examples. 

We took a vacation with the kids, and when I was eyeing a decorative bowl,  my son Tyler was upset with me for buying something and not limiting myself. He asked me, “if I needed it?” I thought about the bowl and realized I had one just like it. I passed on the bowl and let him know he helped me make the right decision.

Teach your children to shop wisely and not to be impulsive about spending. Emphasize need, quality, and price.

3. The Dangers of Credit Cards Versus Debit Cards

Having credit cards are a big responsibility for everyone. Credit card debt is toxic to all to carry large balances. Parents should speak to kids about the difficulty of mounting debt if you don’t pay your credit card balance fully. Parents are having their children become authorized users on their cards at an early age. Many banks do not restrict age, allowing a 10-year-old who may not be truly ready to have one.

Parents should use this opportunity to allow their children to learn to take care of cards by getting debit cards. Reasonable spending limits can encourage to make choices. Parents should talk to kids about what to use the cards for and when to use cash. A debit card is an excellent way for your kids to acclimate themselves to using a card with care. 

Related post: A Guide To Your Child’s Credit Report: Pros And Cons

4. Financial Education For Your Family

The T. Rowe Price study found the effectiveness of financial education in the home or school were both falling short.

Most young adults who received some financial education in school are more likely to have a budget, emergency fund, be good with money, and have a retirement account. However, 34% said that their parents have more influence than schools on financial habits. 78% of young adults who received financial education had it in the 12th grade or later.

Encourage your children’s active participation in family matters that concern them. For example, they can make their case about the allowance they will receive, participate in family budgets for items you are shopping for like school supplies, clothes, and vacations.

Parents should enlighten their kids regarding their attitudes about money management. These are essential skills. For example, discuss getting another car. They can discuss why they may prefer to buy a new or used car outright versus taking a loan or leasing a vehicle.

Saving Money

If your goal is saving money, give your children reasons why buying a used car is better. A new car depreciates about 20% on average as soon as you drive it, plus most new cars lose some value in the first year. Along with these savings, you may pay less for sales tax, insurance, and registration fees.

Parents are in the best position to model responsible behavior about money. Once kids make some money on their own, parents should require their kids to save for their car when they begin to drive.

Still, the problem may go beyond parents’ reluctance to discuss money matters. Parents may be lacking in some areas of financial literacy themselves. It is a good idea to learn about money and to invest together as a family. I often talk to my kids about investing, especially regarding a favorite stock I own and why I still like it. They ask for updates at times.

5. Be Honest With Your Mistakes

We all wish we did everything well. The truth is that we make mistakes. We want our children to do better than us in education, making money, and managing money. If you have made money mistakes, whether it was taking on too much debt and paying it off or not having enough liquidity at times, share that with your kids.

We bought a lot of art and antiques at probably peak prices before we had kids. Frankly, I developed the bug to buy 18th-century Federal furniture and other collectibles, but it doesn’t contribute to retirement savings.

We have tried to sell most of the items, however, the market was difficult so we sold many pieces at discounts to our costs. We shared these problems with our kids when they were older, explaining that while we loved the furniture at the time, it was a huge investment that could have been placed in financial securities. They hated the “old remnants” as they referred to the pieces. 

6. (Kiddie) Roth IRA

My mistake in buying antiques, although beautiful, is that antiques are less liquid than other assets when you want to raise money. This realization does allow me to discuss retirement savings with my kids. Studies show that the Gen Z generation is more aware of the need to set up IRA accounts early. Teenagers can contribute to a Roth IRA up to the amount they make from eligible employment.

If my son Tyler earned $2,000 as a camp counselor or at the movie theater, he can invest all or part of the $2,000. If kids invest all of it, parents can’t contribute up to the current maximum of $6,500 in 2021. Contributions to Roth IRA are limited to Tyler’s earned income of $2,000. If your teen is under 18 years, typically the age of majority, they are minors, and a parent has to serve as a custodian.

While it would be great for your teenager to contribute as much as possible to a retirement savings account, even a portion of their earnings would be a great start. The lesson for them is the growth of their contribution is tax-free and will benefit from compounding returns over the decades.

7. Investing In 529 Plan

As parents, you should set up 529 savings accounts for your children’s college education as early as possible. Your children may not even be walking or talking yet, but that shouldn’t stop you from beginning to save for your children’s future with tax-deferred dollars.

It is way too early to know if they will go to college. However, getting an early jump may allow you and your children to reduce the need to take on debt. If you haven’t opened an account yet, involve your children when you open the account and explain it to them. It is good to know that saving early may reduce the need for student debt later on.

8. Showy Social Media…Keeping Up With The Jones

Our kids are growing up with smartphones. They are continually interacting with their friends, reading about restaurants and vacations they have gone on, shopping for trendy clothes, shoes, and bags. They are exposed to many different lifestyles at a much earlier age than we as parents have been.

It is “Keeping Up With The Joneses” on steroids. Social media has led to many conversations after we recognized our kids looking a little crushed at times. They would point out that their friends were getting more things than they were.

An Example

Our son, Tyler, was on X-Box playing Fortnite with his friends all the time. Most of the kids were buying “skins” which are costly (up to $20 per skin), an expensive endeavor if you splurge for 60 skins.

We didn’t want to have to pay for this unnecessary game expense on an ongoing basis. We had to sit down with our son to explain that every family has different resources and spending patterns.  Some families make more, and some families make less. He gave us good feedback.

Weeks later, his group of friends moved on to another game.

9. Share Family Values versus Sharing Your Salaries

Discussing salaries are a complicated topic, requiring thought. Most families are uncomfortable discussing money in general, and even more so sharing their salaries. About 30% of families do not earn a regular paycheck. Besides, what does that figure tell your children? Often, it is an abstract number. Salary is different than your take-home pay because of the taxes you are required to pay.

Some say that revealing your salary is an essential part of educating your children about finances. It may help your children by being open and build trust in your relationship. Explaining how your take-home pay relates to your household expenditures could help your kids make your budget more transparent.

 A Better Life Lesson

Others say that salaries are personal information and children do tend to share everything. How do you explain your salary differences, or do you have to do so? 

There are many variables to discuss money without necessarily sharing your specific earnings or net worth. They prefer to know what you do for a living, do you like your job, and you will always have one.

It is better to share what you value, such as your family, friends, how you live, spirituality, and your beliefs. Learn what they value as well.

10. Charitable Giving

“To whom much is given, much shall be required.” KJV

It is never too early to involve your kids in giving to important causes to the family. It is a way to talk to your kids and find what their interests are. They can put aside some small amount and physically drop it in a box at a local shopping center or send a check. The point is to have them recognize they have social responsibilities larger than themselves.

Final Thoughts

Communicating openly and clearly with your children about money will help them grow more financially confident. It will strengthen their bond with you and earn their trust about financial literacy, a topic you don’t generally talk about with others. Their increased comfort with you will help them with important money management decisions they will need to make, such as college, career, buying an apartment or home.

Related Post: Why You Need An Emergency Fund (And How To Invest It)

What is your experience in speaking to your children about money? What works and doesn’t work? We would like to hear from you!