How to teach kids about money

Sharing financial knowledge with your children is a great way to set them up for success later in life. Through conversations, games and everyday situations, you can help them develop practical money skills and a better understanding of personal finance.

What you’ll learn:

• Teaching kids about money now can set them up for financial success later in life.

• There are appropriate financial lessons for kids at every age.

• As children become older kids and teenagers, you can even help them establish credit.

• Khan Academy provides free online financial literacy courses that break down complex concepts about budgeting, saving, debt, retirement and more.

Financial literacy has been connected with lower debt, more savings and better credit scores as children grow into adults. You can teach money skills through everyday conversations, examples and activities. Starting with the basics and building on lessons as they mature can help them learn over time.

Kids don’t need an advanced course in economics. They just need to know what’s going on when they see you hand someone $20 or use your credit card. Knowing that money can be exchanged for goods and services and that its value is backed by the government is a great start.

Your kids might notice that you use different methods to pay the mortgage, utility bills, home essentials and major purchases. There are many ways to pay, but you might start with these four:

1. Cash: Paper and coin currencies are the simplest forms of money and the ones your kids are likely already familiar with. Cash can also be an easy way to introduce the idea of saving.

2. Checks: The next time you write a check, use this as a teaching moment. You can explain that this piece of paper tells the bank it’s OK to pay someone on your behalf with money from your account.

3. Debit cards: Need help explaining how a debit card works? A debit card can be introduced as an alternative to carrying cash. And it’s like a check because the money is deducted directly from your bank account.

4. Credit cards: When teaching your kids about how credit cards work, real examples could help them understand. Say your child wants a piece of candy while you’re checking out at the grocery store, you can offer to buy it for them as long as they pay you back from their allowance. As your child gets older, you can introduce more advanced concepts like interest rates and credit scores.

Starting with basics could make it easier to explain mobile wallets and detail the differences between credit cards and debit cards.

Starting with the idea that people earn money in exchange for work is pretty basic. If you think your child is ready, giving them an allowance could reinforce the idea of income.

Once your child understands what currency is and how money can be earned, you can move on to more complex topics.

Responsible spending includes knowing the difference between wants and needs. You can start by helping your child decide what they need and which experiences and purchases they value enough to spend on their wants. You can use your own wants and needs as a good example too.

Your financial goals determine how much you save and why. Are you setting money aside for retirement? Do you have an emergency fund? You can use examples from your life to illustrate the importance of saving money.

Want to help your kids set their own financial goals? A fun, easy way is to have them divide an allowance into three jars: saving, spending and sharing.

They can decide what they want to accomplish with each of these jars. They may want enough money in their spending jar to purchase a piece of candy every week while also saving enough to purchase a new toy in a couple of months. A sharing jar can be used to introduce concepts like generosity and giving back.

This is where earning, spending, saving and sharing all come together. Sticking to a budget and learning the costs of things will help kids better understand money management.

You can show your child how your family budgets and spends money on different things. For example, you could include them when planning for the week’s meals or purchasing their soccer gear.

Want to reinforce the importance of giving back? Consider what causes your child cares about and help them identify a nonprofit to support. Saving up funds to contribute is a great way to teach generosity while introducing concepts like budgeting.

You could even pair volunteer experiences with a monetary donation. This approach may help illustrate the real-life impact of donating to a cause. Plus, the time spent volunteering may make it more memorable.

As your children grow into teenagers, the financial lessons you teach them can become more complex. Understanding concepts like managing a paycheck and building credit can help them establish good financial habits as adults.

Capital One partnered with Khan Academy to offer a free, self-paced financial literacy course.

You could explain how saving makes future fun possible. You can use short-term examples like saving for weekend activities. Or longer-term examples like saving for a new phone or car. You can help your income-earning teen set up automatic transfers from their checking account to a savings account on a weekly or monthly basis.

Credit can seem mysterious at any age. But you can start by explaining the importance of good credit scores. And help your teen understand how behaviors like on-time payments can help them build strong credit scores over time.

Want to help your teen build credit? The earlier they start, the longer their credit history, which is good for their credit scores. 

You may be able to help them build credit if you make your teen an authorized user on your credit card account and:

• The card is used responsibly. That means paying on time every month and not maxing out your card. Negative actions, like missed payments or a high credit utilization ratio, hurt both your and their credit scores. 

• The information appears in their credit reports. Capital One reports authorized users’ account activity to credit bureaus. But credit card issuers aren’t required to do so. If your issuer doesn’t, the information can’t appear on credit reports. And if it’s not on a credit report, it can’t help you improve your teen’s credit scores.

When your teen is 18, consider introducing them to CreditWise from Capital One. With CreditWise, they can check and monitor their credit anytime. CreditWise is free whether your teen is a Capital One cardholder or not. And using CreditWise won’t hurt their credit scores. 

They can also check their credit reports for free at AnnualCreditReport.com.

Think your kid has the financial skills they’ll need as an adult? Need more advice on explaining real-world issues to your teen? Teaching kids about money now can set them up for financial responsibility once they’re in the real world. Learn more about parenting and money.