Parenting & Money, Part 2: Teaching Kids About Money
How to teach kids about money at any age
This is part two of this series on parenting and money. Read part one to learn how to manage your financial life as a parent.
Have you considered how you’ll teach your 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.
Whether you’re a new parent or you’re raising a teenager, there are lessons for kids of every age. So consider these tips when talking to your kids about money.
What Every Young Child Should Know About Money
Money plays a big part in all of our lives, and it’s important to start teaching young children about finances early. With your guidance, they can learn to make smart decisions now and build a strong financial future tomorrow.
When teaching young children about money, start with the basics. You can always build on those lessons as they mature.
Here are seven things every child should know about money:
1. What money is
This doesn’t need to be an advanced course in economics. Kids just need to know what’s going on when you hand someone $20. Knowing that money can be exchanged for goods and services and that its value is backed by the government is a great start.
2. The many ways to pay
Your kids might notice that you use a check to pay the mortgage, a debit card for the
utilities, cash for a bottle of shampoo and a credit card for a new lawn mower. This is a good time to talk with your child to make sure they understand how each works.
Let your kid take a look at each form of money you use and share when and why you might use one instead of another. While there are many ways to pay in today’s digital age, you might start with these four:
- Cash. Paper and coin currencies are the simplest forms of money and the ones your kid is likely already familiar with. Cash can also be a great way to introduce budgeting concepts like setting aside a $20 bill as spending money for the week or adding coins into a piggy bank.
- Checks. The next time you pull out your checkbook to 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.
- Debit cards. Need help explaining how a debit card works? Try comparing it with cash and checks. A debit card can be introduced as an alternative to carrying around cash. And it’s like a check because the money is deducted directly from your bank account.
- Credit cards. When teaching your kids about credit, real examples help. For instance, if 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. You can also point out when you use a credit card, whether you’re buying new furniture or filling up at the pump. Later, as your child gets older, you can introduce concepts like interest rates and credit scores.
Once your kid understands these common forms of money, you should have an easier time explaining concepts like mobile wallets.
[Want help explaining the differences between credit cards and debit cards? Here’s a quick guide.]
3. How to earn money
Once your child understands what money is, you can use this foundational knowledge to connect the concepts of money and work.
Start with the simple concept that people go to work in exchange for an income. You can then explain how you receive a paycheck each pay period because you performed the duties of your job.
Giving your kid an allowance is another way to teach kids about work and money. For example, you can explain that you pay them an allowance once a week for doing certain chores. In exchange for their “work” (the chores), they receive a “paycheck” (their allowance).
Want to reinforce the rewards of hard work? Consider providing opportunities to earn more money in exchange for additional chores—like an extra $5 for washing the car on a weekend.
4. How to spend responsibly
Responsible spending includes knowing the difference between wants and needs. So you may want to begin teaching your kid about this distinction at a young age.
You can start by helping your child decide what they need and which experiences and purchases they value enough to spend on their wants. For example, they may want the latest and greatest toy, but ask them to consider whether it’s a need or a want.
You can use your own wants and needs as an example, too. For example, you might explain that purchasing groceries every week is a need, while a family dinner at your favorite restaurant is a want—but one that may be important enough for you to budget for and spend money on.
5. How (and why) to save
Our financial goals determine how much we save and why. Are you setting money aside for retirement? Or shoring up your emergency fund for unexpected car maintenance? 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 having them divide an allowance into three jars: saving, spending and sharing.
Have them 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. Meanwhile, a sharing jar can be used to introduce concepts like generosity and giving back.
And, who knows, maybe they’ll put enough money in their savings jar to help you pay for college one day. One can hope, right?
6. The importance of giving back
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. For example, your child could donate to a local hunger-relief organization, then spend a few hours volunteering to help sort cans of food at its food pantry. This approach may help illustrate the real-life impact of donating to a cause, and the time spent volunteering may make it more memorable.
Keep in mind that there’s often an age minimum for volunteer opportunities, so look for age-appropriate activities, and check with the volunteer coordinator before bringing your child along. Online services like VolunteerMatch® can help you find the right opportunities and so can nonprofit directories specific to your city or town.
7. How to build (and follow) a budget
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.
There are fun budgeting games for students online, including ones available for phones and tablets, to show kids good budgeting techniques and explain other financial practices. You can also teach your child how your family budgets and spends money on different things, such as planning for the week’s meals or purchasing soccer gear.
[What are you teaching your kids about money? Read firsthand accounts of money lessons people learned from their parents.]
Teaching Kids About Money in the Digital Age
When you were a kid, you probably played board games with brightly colored fake money, ran a lemonade stand and saved your hard-earned cash in an actual piggy bank. You were so busy having fun, you didn’t realize you were learning important lessons about earning, saving, spending and debt.
Your kids might still play the occasional board game, but they’re probably more interested in electronic games. And thanks to advances in technology, you can teach kids about money with mobile, tablet and desktop apps that put a modern spin on the games you once loved.
These apps can help kids learn about money and how it works, making your conversations about money more relevant. And some of them make real-life lessons easier to manage, too, like assigning chores to your kids and paying them with real or virtual money right from your phone.
Advanced Money Lessons for Teens
Your child’s appetite and capacity for advanced lessons in money will likely increase with each year of their life. By the time they reach their teenage years, you may want to encourage them to take on additional responsibility and learn more about personal finance. And the more your child learns about managing money now, the less likely they are to learn certain lessons the hard way once they leave home.
As you expand on concepts they already understand, consider taking a deep dive with these seven advanced money lessons for teens:
1. There’s value in hard work
An after-school or summer job can help put the value of money into perspective for your teenager. When they receive their first paycheck, they’ll be excited to gain some spending money—but it’s also a lesson about the value and reward of hard work. They’ll see their time and efforts translated into earnings, and that may help them appreciate money in ways they couldn’t previously.
A job can also help teens learn important life skills like how to write a resume and cover letter, build a LinkedIn® profile, fill out an application, and prepare for an interview. Eventually, you’ll have the opportunity to teach them how to fill out a W2 and, later, a tax return.
If holding a traditional after-school job isn’t a good option for your teen, think outside the box. If they excel at sports, they could pick up a job as a referee for a local sports league. And crafty kids might embrace their entrepreneurial side with an online store. You can help them explore websites and apps that make it easy to find one-off gigs and earn income tutoring, selling crafts or sharing other unique skills.
2. Save it for a rainy day
As your teen gets older, it’s easier for them to understand the real-life consequences of unexpected expenses.
You can use day-to-day situations that apply to their lives as teachable moments about the importance of saving for emergencies. For example, you might explain to a new or aspiring driver how savings can help cover car repairs—putting them back on the road faster after unexpected car trouble.
While a parent’s emergency fund may consider a number of necessary expenses—like the mortgage or rent, student loans, or a car payment—your child’s savings needs may be less obvious to them. Work with your teen to think through potential scenarios, like car issues or a cracked cellphone screen, and help them decide on a savings goal. Even if they never need this money, working toward a goal is a great way to make saving a habit and not just an afterthought.
If your teen doesn’t have a checking or savings account, this can be a good time to help them open one. Your bank may even offer accounts designed specifically for teens.
3. Saving also makes future fun possible
Need more help teaching your teen to save? Try explaining how saving makes future fun possible. You can use short-term examples like saving for weekend activities and longer-term ones like saving for a new phone or car to drive the point home.
And, believe it or not, this can also be a good time to teach children about retirement. Once your teen is earning money, you can open a tax-advantaged retirement account in their name. You’ll be giving your kid a head start and the benefit of extra years of compounding interest.
Pro tip: You can help your income-earning teen set up automatic transfers from their checking account to a savings account on a recurring weekly or monthly basis.
4. Always know what you have before you buy
Want to help your teen avoid overdrafts and maxed-out cards? Teach them the importance of signing in to their online bank account to check their balance and view any pending transactions.
Your teen may prefer apps to printed statements and checkbooks, and electronic transfers to handwritten checks. Work with them to create money management habits that fit their lifestyle. You can help them set up email or text alerts that send regular balance notices so they’re always in the know.
Some banks are even developing new technology like chatbots and AI. Capital One’s chatbot, Eno®, can handle credit card payments, bill reminders and more.
5. Use credit responsibly and pay bills on time
Credit can seem like a mysterious topic to teenagers. But you can start by explaining the importance of a good credit score as an adult. And help your teen understand how behaviors like on-time payments can help them build a strong credit score over time.
Want to help your teen build their own credit history? Adding them to your account as an authorized user is a great place to start, but pay attention to age limits set by credit card issuers. While some companies might not set one, you still want to be cautious.
As an authorized user, your teen will be linked to your existing credit card account and will have permission to make purchases. They’ll get their own card, but you’ll be responsible for payments.
Walk your kid through how and when to use their new card. Are they allowed to use it only in emergencies? Should they ask for permission before using it? For added peace of mind, see whether your card issuer will let you set spending limits for authorized users.
To help your teen check and monitor their credit score, try CreditWise® from Capital One®—it’s free, and it won’t hurt their credit when they check their score.
Getting a credit card for a teenager is something you should consider carefully, but building a credit history can be helpful to their financial future, depending on their age. If your teen starts building credit as a teenager, they may have a longer credit history than some of their peers, which could give them access to the larger lines of credit needed to make big purchases in the future. And without a credit score, they could hit speed bumps when it comes time to rent an apartment, open utility accounts or take out a loan.
[Still wondering when and how to teach your teen about credit? Read more about teens and credit cards.]
6. A budget should be helpful, not dreadful
Want to help your teen build and follow a budget? Start by reinforcing how a budget can help them achieve their financial goals.
Ask them to think about how much income they have, how they’ve been spending their money, and what they’d like to be able to purchase or save for next. Then, show them how expenses can be categorized based on common purchases like dining out, entertainment, clothes and hobbies.
You can write out a budget on paper, but popular budgeting sites have visualization tools that can make this more fun and easier for your teen to understand.
7. Their financial future is their responsibility
You may be giving your teenager more responsibility. But chances are you’re still paying for some, or all, of their major expenses. Maybe they’re earning their own money—but if they’re living under your roof, they’re not fully in charge of their financial lives.
If your child experiences a financial setback when they’re young, it can be an opportunity for them to learn. And once they’re on their own, they may be better prepared to take responsibility for their financial life.
For example, if your teen damages their car or breaks their cellphone, you could have a conversation with them about whether it makes sense for them to pay for the repair themselves. If your child doesn't have the resources and you’re able and willing to cover the repair cost up front, you could have them pay you back as they would any other loan.
Learn, Grow and Focus on What Matters
Think your kid has the financial skills they’ll need as an adult? Need more advice on explaining real-world issues to your teen? There’s always more to learn about parenting and money.
Constant changes in education, technology, health care and the tax code make staying up to date important. You’ll find ideas and advice on topics including life events, money management, privacy and security on Capital One’s blog, Learn & Grow.
[Questions about family finances? Read part one of this series on parenting and money.]
We hope that you found this helpful. Our content is not intended to provide legal, investment, or financial advice or to indicate the Capital One product or service is available or right for you. For specific advice about your unique circumstances, consider talking with a qualified professional.