By Liz Moisio, J.D., MBA – Vice President & Wealth Management Advisor
Regardless of the age of your children, the first step in educating them about finances is communicating what money means to you. From there, focus on familiarizing your children with the concepts of earning, spending, saving, investing, and giving. Ideally, engage them early on and teach them not to be embarrassed when dealing with money challenges. Use this time to learn what your kids are interested in, what their goals are, and what they envision for their future.
As early as the age of two, you can begin teaching the basics of how money works through a pretend playlike store – exchanging play money for goods. By age three, you can introduce the concepts of opportunity cost and delayed gratification: begin by showing your children how to make change, demonstrating the notion that making a purchase results in less money. When they receive money, allow children to make their own spending choices and don’t shelter them from an impulsive purchase, rather use this as an opportunity to teach your children about the disappointment that results from an impulsive purchase and the cost of making poor choices with money. Teaching your children the cost of poor spending now with $10 of birthday money will teach them to make better spending choices and minimize the chance they will make $1,000 or $10,000 mistakes as an adult.
During the preschool years you can introduce the concept of smart spending and help children distinguish wants from needs. By age five or six you can introduce an allowance and open a savings account. Tie the allowance to completion of certain tasks or academic achievements to establish effective goal setting. By creating a savings account in the child’s name, they can practice the fundamentals of saving. As they age you can build upon this concept by tracking spending, discussing the time value of money, and illustrating the power of compounding.
By the tween years, you can introduce basic credit and investment concepts by playing Monopoly® or other board games. During the teen years you can refine your children’s understanding of needs vs. wants (I need jeans but I want the designer brand). Begin by setting a budget for your children and teach them about informed spending, practicing comparison shopping with them when you go to the grocery store or make a purchase online. Additionally, you can use birthdays as an opportunity to gift donations to a charity of their choice and discuss the importance of giving. For an introduction to the stock market, many teens would benefit from one of the many online tools that allow you to set up a pretend investment account. This type of simulation also opens up the door to other concepts you can teach your children such as how to read a financial statement.
Teaching your kids about money management doesn’t happen overnight, it’s the example you set through the comments you make and the actions you take day after day. At Central Trust Company our professionals provide financial planning, tax, and investment advice to help you manage money responsibly; we encourage your children to participate in these conversations and we regularly produce video and literary content to educate families and offer ideas on how to discuss financial concepts with children of all ages.