5 Important Lessons To Teach Your Kids About Money

Introduction

This post outlines 5 important lessons that you should teach your kids about money. It really is up to you!

Who Is This Post For?

When I started this blog, I was unsure whether I was writing it for the average person who was struggling with their finances or if it should be written for kids or if it should be written for parents. What I found out was that though the audience may vary, the message is the same.

The simple things that we should all be doing to improve our future lives are the same things that kids should be learning early, either at school or taught to them by their parents.

So this post is in one sense for those who haven’t worked it out yet. It’s also for kids who have time to work it out but should start early and of course, as the title suggests, it’s for parents to think about what things they could be teaching their kids about money. 

Things That I Learned Too Late

I’ve taught Economics for over 20 years now. The first time I ever heard about the subject was when at the age of fifteen, I needed to select subjects for my final 2 years of high school. It seemed like such a complicated subject that was probably more suited to university-level study. And I struggled with it for a while.

But I did learn a valuable lesson for life. That lesson was the lesson of opportunity cost. My teacher explained that by choosing to be at school and sit in his class, I had given up 2 years of potential salary that I could have been earning out in the workforce as some of my friends had chosen to do. This was his way of saying ‘Make the most of it and don’t stuff it up’. He was right. I had literally given up tens of thousands of dollars to stay at school and to learn Economics. Life is full of opportunity costs. What is the cost of ‘not’ learning about money?

I later also realised that Economics is just a subject about choices and trade-offs. And students shouldn’t wait until university to learn these things. In fact, it is quite possible and even advisable to teach some simple elements of the subject from Grade 1 rather than waiting until Grade 11. The same applies to many parts of life and especially to the subject of money.

It is also worth noting that I didn’t learn anything about personal finance in that Economics course. That, I had to learn for myself through many tough lessons in the real world. Some would say that personal finance and money management is a simple case of common sense. But if that was the case, then why do some many of us completely stuff it up?

What Does Warren Buffet Say?

I recently read an article focused on Warren Buffet’s thoughts on teaching kids about money. His view, which I definitely agree with, is that we should be teaching kids about money early. But, not only that, we should design activities to help them learn. In effect, he is saying that we should be teachers. 

Buffet himself has often talked of the things that he learnt as a kid through just doing things himself. At the age of six, he purchased a six-pack of Coke for 25 cents with his allowance and sold each for 10 cents. He also sold magazines and gum door-to-door. Had he not been given an allowance, he would not have been able to come up with either idea to make his allowance grow. 

“My dad was my greatest inspiration,” Buffett said in an interview with CNBC back in 2013. “What I learned at an early age from him was to have the right habits early. Saving was an important lesson he taught me.”

“Most parents already know how important it is to teach their kids about money and how to manage it properly,” Buffett acknowledged. But there’s a difference between knowing and taking action.

Kids Are Not Too Young

A study from Cambridge University found that kids are already able to grasp basic money concepts between the ages of 3 and 4. And by age 7, basic concepts relating to future financial behaviours will typically have developed.

Unfortunately, we can’t just assume that kids will learn these things on their own or that they will learn them at school. 

I’ve read two books recently that are aimed at teaching kids about the world of money. They come from different perspectives but are both quite useful. The first is ‘Barefoot Kids’ by Scott Pape which I have reviewed in an earlier post. The other is ‘Rich Dad Poor Dad For Teens’ by Robert Kiyosaki. Both offer excellent ideas on how to teach kids about money and both include interactive activities to help kids learn in a practical way. I highly recommend both. 

Having condensed many of the resources available and observed my own students in the Money Club that I run at my school, I’ve come up with what I consider to be 5 important things that parents (or teachers) really should teach kids about money. 

Lesson Number 1: This Is Money

It’s hard to learn about money when you don’t have any. Kids need to be provided with an allowance at an early age. Just having the power to buy something for yourself at a young age can be life-changing in the world of a child. Ideally, this allowance can be earned by doing extra chores around the house to truly teach that money has value but also needs to be earned. But to keep things simple, Lesson Number 1 is simply ‘Here is some money and this is what you can do with it’.

Lesson 2: How To Start Saving Money

As Ben Franklin once said, “A penny saved is a penny earned.” To help your kids learn to manage their money, it’s important for them to understand the difference between wants and needs. It’s one of the first things that I teach my students but most adults haven’t quite grasped the concept. How often do we hear things like ‘I need that new car’ or ‘I need the newest iPhone’?

Teach kids that needs are food, water, clothing and shelter and that wants are everything else that we consume but that are not required for survival.

Give each of your kids two money jars: One for savings and one for spending. Each time they receive money (e.g., as a gift, for allowance, for walking the neighbour’s dog), talk to them about how they wish to split the money between savings and spending.

Have your kids make a list or create a collage of magazine photos of five to ten things they’d like to purchase. Then, go through each item with them and mark whether it’s a want or a need (e.g., a new toy is a want, while a new backpack for school is at least closer to a need.)

Lesson 3: How To Differentiate Between Price And Value

We’ve all been guilty of paying more money for a cool brand of shoes or gadget when we could have gotten a similar item that was just as good for a lesser price.

The idea behind this lesson is to help kids understand the different ways advertisers get us to buy their services or products, as well as how to tell what is and what isn’t worth paying for.

Pick up a magazine with your kids and choose an ad to evaluate. Ask them: What’s being sold? What message is the ad trying to get across? What catches their attention in the ad? How does the ad make them feel? How is it trying to persuade them to buy the product?

Lesson 4: How To Make Good Decisions

Once kids start spending money they automatically learn the value of making good choices. They can’t buy everything so they must choose. The key to making smart decisions is to think about how different choices can impact future outcomes.

We should be modelling good decision-making skills and talking to our kids about decisions as we make them, as well as any resulting domino effect they could have. For example: “We want to buy a new TV, but our AC is broken and we need to save money to get it fixed. If we don’t, it will be too hot in the house when summer comes. Once the AC is repaired, we can think about buying the TV.”

Get your kids into the habit of making good decisions about how to save money. Ask them to think about their planned purchases. Is it a need or a want? Is there a better alternative? Can they save a little more to purchase a better option a little later?

Lesson 5: How To Be A Creative Thinker

The goal of this lesson is to encourage your kids not to give up just because something doesn’t work the first time. The ability to think creatively and outside the box will come in handy when they run into future financial challenges. 

An activity that you could try is to turn your trash into treasure by challenging your kids to come up with new uses for old things around the house (e.g., bottle caps can double as checker pieces, an empty cereal box can be turned into a magazine holder). This will help teach them how to think critically, save money and help the environment all at the same time.

It’s Never Too Early

Instilling healthy financial habits in your kids is one of the most important things you can do to help ensure they have a successful future.“It’s never too early,” Buffett said in a Q&A with Yahoo Finance in 2013. “Whether it’s teaching kids the value of a dollar, the difference between needs and wants or the value of saving — these are all concepts that kids encounter at a very early age, so it’s best to help them to understand it”.

I hope that these five lessons are food for thought and that they help you to take an active role in teaching your child, younger sibling or students about money. The actual lessons themselves are less important than the simple process of giving opportunities to learn and actually starting conversations about money and about the importance of learning how to use it better. 

Please read my other articles for a variety of hopefully helpful advice. 

Related articles:

The Financial Roadmap For High School Graduates

Ten ThingsThat They Didn’t Teach You At School

Who Should Teach Our Kids About Money?