When it comes to talking to kids about money, many parents can be a bit nervous.
An annual “Parents, Kids and Money Survey” conducted over the past 10 years by T. Rowe Price has consistently found that parents are just as uncomfortable talking to their kids about money as they are about sex and drugs. So, you’re not alone!
It’s never too early to start teaching children about money.
Simply start at an age appropriate level and build on the concepts as they mature. And don’t worry if you haven’t started talking to your teen about money yet – it’s also never too late!
A Guide to Talking to Your Kids about Money
Young Children
Between the ages of 3-5, children may not be able to grasp the mathematic concepts related to money. But they can understand some of the basics about needs versus wants. Your conversations at this age can focus on the types of expenses that are needs vs. wants – We need to buy food at the grocery store; we want to buy candy at the checkout.
Encouraging your child to be able to make the distinction between needs and wants and learning the benefit of delayed gratification – we can buy this now, but if we save our money this week and next week, we can afford to buy that instead – lays the foundation for making smart money decisions as they get older.
Elementary School
Get your children involved when you shop at the grocery store! You can start by letting them know how much you plan on spending and enlist their help in keeping track of how much each item costs. Not only are they practicing their addition and subtraction skills, but they are learning the value of a dollar at the same time.
This is also a good stage to incorporate an allowance for your child. Whether this is something that’s earned or simply given is up to you, but having “their own money” gives children the opportunity to build confidence about their ability to manage their own finances. It also gives parents the opportunity to talk about how much to save, how much to give, and how much to spend.
Middle School
If you haven’t already, this is a good time to take your child to the bank with you to set up a savings or checking account.
This opens up the conversation about why putting money in an interest-bearing account might be a better place than the piggy bank at home for your child’s savings.
It’s also important to start talking about how credit cards work. Most kids see their parents swipe the plastic card for all of their purchases. As a result, they might not truly understand the cost of these goods and service or how they are actually paid for.
Consider showing them your credit card bill. Review the purchases and talk about how you make sure you don’t overspend, which is easy to do when using credit cards instead of cash.
Teach them about the convenience of credit cards but also the costs if they are not paid off every month. A credit card with a 12% interest rate will charge you 1% per month on any balance that is carried from one statement period through the next. This is the exact opposite of how interest paid TO you on a savings account each month.
High School
If you’re comfortable with it, this is a good time to let your child in on some of the discussions about the family budget. You don’t necessarily need to give them all the details about your income and expenses, but simply exposing them to some of the expenses of running a household is a valuable lesson.
Talk about the various bills that need to be paid each month – gas, water, electricity, cable, telephone, mortgage/rent, etc. Review your electric bill with them (they might finally understand why you tell them to turn the lights off when they leave a room!).
Your high-schooler might be earning their own money. If they aren’t already, encourage them to start saving for college and/or retirement. Any income your child earns is eligible to be contributed to a Roth IRA, up to a maximum of $5,500 per year.
While they might have other plans for their money, perhaps, as an incentive for them if you’re able to do it, you offer to match their earnings, dollar-for-dollar on every dollar they contribute to a Roth IRA. That way, they don’t miss out on having their spending money, AND they learn the habit of saving for retirement.
To put the benefit of saving early in perspective, if your child contributed $1,000 per year to a Roth IRA between the ages of 16-20 (assuming it grew at 6% per year) by age 65 that $5,000 contributed would have grown to over $290,000! (They’ll be sure to thank you later!)
College and Beyond
As your child prepares to enter the working world, it’s time to shift gears and start talking about the more adult topics like balancing retirement savings and paying off student loans, budgeting, insurance, etc.
While their inclination might be to “hurry up and pay off their student loan debt” they should carefully consider balancing that with starting to save for retirement. Both are important at this stage.
If your child started saving 10% of their income from the time you gave them an allowance, this habit should translate right into adulthood when they should, ideally, start contributing 10% of their income to retirement savings. If 10% isn’t feasible at first, they should at least contribute up to the employer’s matching contribution, which will typically follow a vesting schedule. So, they’ll need to keep in mind that they won’t be able to “take that employer contribution with them” until they’re fully vested.
This will likely be the first time that your child has had to think about insurance. Start by talking about the basics – co-pays, deductibles, out of pocket maximums. Encourage them to view these various employer benefits as part of their overall compensation package when choosing a job – a $50,000 a year job with no 401(k) matching and high insurance premiums may not actually be as financially beneficial as the $45,000 a year job with generous 401(k) matching and low insurance premiums.
You’ll find that once you start incorporating the concepts of saving into your everyday conversations, it will be easier to have those bigger money talks when the time comes!
Happy saving... for you AND your kids!