Kids learn about how to use money from their parents, but it turns out that most parents don’t like talking to their kids about money. In fact, a lot of parents feel more prepared to talk to their kids about sex than about money. This has led to a generation that has amassed a huge amount of debt, including almost $800 billion in credit card debt as a country, and is teaching the next generation even less about how to properly use money.
This is why we need to start having conversations with our kids now. If you have money conversations with your kids starting at a young age, it will be easier to teach them along the way. We’ve put together five essential money talks that you should be having with your kids during key developmental periods of their lives.
What is money and how does it work? (Ages 3-5)
This is the age range when kids start asking a lot of questions, and it’s our job as parents to answer those questions openly and honestly. While answering questions like “What makes a car go?” can be difficult, answering questions about money is generally easier. When they see you paying for your groceries with cash and ask what it is, explain to them how money is used to pay for things that the family needs, like groceries. When they ask where it comes from, relate it to the jobs that you and/or your spouse have. Regardless of the question, answering honestly will give your child a solid understanding of how money works.
How to properly use money (Ages 6-8)
Once your kids know about how money works, it is always a good idea to let them use money during their development ages so they get some hands on experience with using money. This is usually when parents start giving their children an allowance, but it also a good idea to make sure that they know the value of the money you are giving them. Take them to the store and let them buy things with their own allowance. Let them pay for things themselves instead of you handing their money to the cashier. If they can’t afford something they really want, instead of just buying it for them outright, let them know that they still owe you the difference of the cost and they can pay you out of future allowances. This will not only teach them about money, but also the basic concept of borrowing and credit.
How to save and budget (Ages 9-12)
After years of getting an allowance, hopefully your kids have some money set aside for a rainy day. But let’s be honest, most kids spend their money as soon as they get it. This is a good age range to teach them about delayed gratification and how saving up money can lead to bigger and better purchases. With the rise in technology and children’s natural attraction to it, it might even be a good idea to sign them up for a site like Mint.com or Manilla. It’s free, and each has a flashy dashboard that helps them monitor their money. You should also consider signing your kids up for a savings account and offering them a match program. If they deposit a certain amount in their savings, you will match that amount. It will get them excited about saving.
How to use credit (Ages 13-18)
The big problem with credit in our country is that most kids don’t learn about using credit until they have credit cards of their own, and then they end up learning about interest and fees by racking up a huge bill on their credit cards. Instead, consider adding your child to one of your credit cards when they reach their teen years. You can easily monitor their spending and go over the bill with them every month so they understand about interest, late fees and other hidden costs that credit cards have. This way, they will be better prepared when they get their own credit card. Just make sure you add them to a card that has a low credit limit, so they aren’t tempted to run up a huge bill on your credit card. After they turn 18, you can help them sign up for their own credit card and start building more credit.
Why loans are important and the right way to use them (Ages 18+)
Once your kids have graduated high school, they are going to move on to a part of their lives that includes car insurance, mortgages and other types of loans. You can start by requiring them to take out their own loan for college, even if it is a small loan. Tell them which loan they choose is up to them, and ask them to do some research on different loans to find the best one. If they need help with the research, try checking out SimpleTuition, which compares loans from the most popular student loan services, or FAFSA.com, which can help you apply for different student financial help. When they choose their loan, you can sit down with them and go over interest rates, what the monthly payments will be after college and other aspects of the loan to make sure they’ve chosen the right loan. This will prepare them to do the same research when applying for car loans and mortgages later in life.