When it comes to advice on how to teach your kids about money, it’s hard to sort through the not-so-great stuff to get to the “oh, that’s helpful!” parts.
It’s unfortunate because experts say that it’s important to broach the subject of money with kids at a young age, but studies show that parents are more comfortable discussing bullying, drugs and smoking than family finances or investing.
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“There’s no way to expect a child at any age to understand money unless you talk about it,” says Neale Godfrey, author of “Money Doesn’t Grow on Trees: A Parent’s Guide to Raising Financially Responsible Children.”
So what should you talk about? Godfrey walks us through what she thinks are the five most important financial conversations to have with your kid.
1. People Earn Money at Their Jobs
Teaching children the importance of hard work is part of what Godfrey calls the “no entitlement program.”
“It’s about raising kids who understand money doesn’t grow on trees,” she says. You’ll know your child is ready to learn what it means to have a job when she starts nagging for money to buy things. “Once your kid recognizes that you’re using money to make purchases, usually around 3 years old, it’s time to teach her where that money comes from,” adds Godfrey.
Best Approach: Discuss how you picked your career, and what you do at work–and then ask her what she might like to be when she’s older. Consider also paying your kid extra cash, beyond her allowance, for tasks that she accomplishes related to that career. For example, if she wants to be a veterinarian, put her in charge of walking, bathing and feeding the dog, and pay her slightly extra for the tasks.
2. You Need to Budget if You Want to Buy Things
A lot of parents forget to explain to their kids what they’re supposed to do with money once it’s earned. “When you’re a child, and you’re given a lump sum of money, if no one teaches you what to do with it, you’ll grow up thinking it’s all meant to be spent,” says Godfrey.
Best Approach: Children as young as three can start receiving an allowance, and with that allowance comes the idea of budgeting and saving. Godfrey suggests using four clear jars (the visual aspect is important for kids), and sitting down on allowance day with the jars to divvy up the money into 10% for charity, 30% for quick cash, 30% for savings to be used in the next couple of years and 30% for long-term savings.
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“When you’re at the store, have your kid point out items that she wants,” says Godfrey. “For less expensive things, tell her that she can pay for those out of her “quick cash,” but for more expensive items–like a bike or a video game system–she’ll need to save up for them using her “long-term savings” jar.”
3. Giving Back Is Just as Important as Saving for Yourself
If your kid has allowance jars, he’ll know that part of his money has to go toward charity. Now you just need to pick the charity–and make it a habit.
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Best Approach: Giving back is an important part of life, but the concept may take some getting used for small kids. “The easiest way to help your kid understand why it’s so important is to first involve him in ways that he can see how he’s making a difference, like helping at the food bank or sorting through clothes for the homeless,” says Godfrey. As he gets older, search through Charity Navigator together to find an organization that interests him, and make donating to that organization a regular routine on allowance day or at the end of the month.