Teaching kids about money at any age

Raising two boys, I have learned that when it comes to understanding money, starting earlier is better. It may begin with simple lessons, but the goal is to ultimately ensure that your kids have a healthy respect for and understanding of the value of money — and what it takes to buy that pair of sneakers or new dress. With early teaching, later bad habits can hopefully be avoided or greatly minimized.

Ages 2-3

When kids are this young, it’s pretty simple. You can introduce them to the concept of money by showing them various coins and explaining their value. As they become more familiar with each form of currency, consider playing store and exchanging money for goods. For example, if your child has a pretend kitchenette set, have them make you a meal, which you pay for with a coin. Not only does it teach them about commerce, but it allows them to start seeing money at work.

Ages 3-5

This is a time when children begin to understand the concept of a budget and delayed gratification.

When kids are between the ages of 3-5, one of the biggest lessons to teach is patience. In other words — they may have to wait to save money before buying something. Setting your child’s expectations upfront is often critical here. When you go into a store, tell your child beforehand that, “we’re buying XYZ but we’re not buying a toy because we’re not here for that.” Or, “I’ll buy you one snack, some cheese or an apple. Which one would you like?” If your child wants three toys, say you’re only going to buy one. Or, let them know that the budget is $25 for toys and that’s it for the day. This approach begins to define the concept of money having value, and to purchase items you may have to give something up. Kids this young can’t yet understand the concept of a budget, but on an emotional level, they will understand that they can’t necessarily get everything they want all at once.

I still teach this lesson to my teenager. He likes expensive, limited-run shoes. I let him know that we’ll pay for the standard $60-$70 shoes. If he wants the limited edition ones, then he needs to kick in the rest.

Another effective technique is to provide kids with a piece of paper and a crayon. They can draw images of things they want to save up for.

In addition to the above, parents can help their children save money by using three jars labeled with one of the following: Save, Spend and Share. Each time your child receives money (birthday money, allowance or payment for chores), have them divide the money equally among the jars. The spending jar is used for small purchases, like stickers or candy. The saving jar is for more expensive items that your child may want in the future, and the sharing jar is for your child to donate to a charity. Some parents prefer to only have spend and save jars — there really are no hard and fast rules. Do what works best for your family. If you’d like to do this online, check out the website: http://www.threejars.com/home.

Ages 6-10

Between the ages of 6-10, continue to build on what you taught for ages 3-5, but also focus on the idea of making choices related to spending money. Explain that money is a limited resource and once you spend it all, you don’t have any more left. You can expose your child to more adult financial decision-making.

This can be as simple as providing them with $5 in the supermarket and having them choose what fruit or snack to buy. Alternatively, you can explain why you make certain purchases. For example, “I am buying the generic brand of frozen waffles because it’s $1 cheaper and tastes the same.”

Since you’re teaching how to make choices, as you’re shopping, ask questions like:

• Is this for fun or something that I really need?
• Can I buy this for less somewhere else?
• Can I borrow this instead?
• Needs vs. wants

This helps kids understand what purchases are necessary and which ones are a choice. For example, “We can’t afford an iPad right now — we’re choosing to buy food and cover basic necessities instead.”

Ages 11-13

This is where the real action begins and where life lessons can stick into adulthood. This includes budgeting, allowances, being paid for special jobs or maybe even grades. Each of these concepts can be fully immersed into the real economy.

At this age, you can give your child more autonomy and open up a bank account for them — providing an early sense of responsibility and ownership. Some key things to consider:

• Make sure you’re able to monitor and track your child’s spending and saving through online or mobile banking. This is a critical feature for parents as it provides unbiased information on whether the child has absorbed the money lessons you’ve been teaching for the past 10 years.
• Look for an account that issues a debit card to your child, so they can pay for their own purchases.
• Parents should be able to receive alerts if funds in the child’s account are low or transactions exceed a certain pre-set limit.
• You also want an account where money can be easily transferred in and out. Parents can pay an allowance, while kids can quickly pay parents back for purchases.

Tech CU’s Family Banking does all of the above.

Ages 14-16

Here, money concepts become more complicated. Once kids hit this age, consider introducing the concept of compounding interest — it’s one of the most-compelling and persuasive tools available to encourage short-term sacrifice for long-term gain. Simply stated, compounding interest allows the saver to earn interest on interest as opposed to interest on principal only. There are a variety of compounding interest calculators available to help demonstrate this concept.

Parents may also want to introduce investing in the stock market. It can be as simple as explaining what it is and how it works. Let kids know that stock is a type of security that signifies ownership in a corporation. As a holder of stock (shareholder), you have claim to part of the corporation's assets and earnings, and are also a part owner of the company. Ownership is determined by the number of shares a person owns relative to the number of outstanding shares. For example, if a company has 1,000 shares of stock outstanding and one person owns 100 shares, that person would own and have claim to 10% of the company's assets.

As an exercise, have each family member pick five stocks to invest in (they should be companies your child is familiar with, like Disney or Coke). Show the stock ticker and note the current price. Watch how the value fluctuates each month. Your child may want to know why certain stock prices change. Discuss in simple terms what’s happening in the economy or within a particular company to cause ups and downs. For example, an acquisition or a presidential election can affect prices.

Summarize the main things that will affect stock price which include:

1. Supply and demand for the stock
2. The value of the company, which is price times (x) the number of shares outstanding (market capitalization)
3. Earnings
4. Other indicators that investors use to predict stock price include expectations for the company or other market forces (i.e. if China no longer traded with the US, it could impact the stock prices of companies who manufacture there)

There are many theories that try to explain the way stock prices move the way they do. Unfortunately, there is no one theory that explains everything.

Ages 16+

Sticking to and maintaining a monthly budget is wise at this age. Teenagers tend to go to lunch with friends, do things after school with their friends, and they need money. One way to come up with a budget is to have your child do a little presentation (i.e. PowerPoint) where they “pitch” their financial needs based on expected expenditures. Let’s say together you decide the budget is $100 per month ($25 each week). Each month you deposit $100 into your child’s account, which they can access with their debit card. Determine if this money is just for “fun” or also includes paying for gas, washing a car (assuming they are driving), clothing, etc. Also, figure out a consequence if your child runs out of money before the end of the month.