Tips for Talking with Your Kids About Finances

Understanding finances and having a healthy relationship with money is vital to being a successful adult. And, yet, often children are not being taught important financial information about money from their parents. In fact, a 2016 T. Rowe Price survey found 71% of parents are reluctant to talk about money with their children. And only 22% of kids say they talk with their parents “frequently” about money. Having an open dialogue with your children about finances is important to prepare them for success in the future. As uncomfortable as it may be to discuss finances with your children, you need to do it. In today’s post we share specific tips for talking with your kids about the importance of saving for their future and utilizing smart investment tools and strategies.

  1. Introduce key concepts early. According to Beth Kobliner, New York Times bestselling author and member of the President’s Advisory Council on Financial Responsibility, children are capable of learning about specific financial topics like saving and spending as early as three years old. By beginning the conversation about money early, your children can form a better understanding about the relationship with money and satisfying needs and wants. It also helps put into context your own financial situation as a family. Perhaps a young family is working to pay off student loans from one of the parents or perhaps the family is choosing to move into a new home. Discussing basic tenants as to why certain decisions are made for the family can help the child begin to understand how money works. Certainly a three-year-old will not understand the intricate workings of a mortgage, but they are capable of understanding the importance of saving. This conversation will help kids understand the importance of delayed gratification and the idea of working hard and saving to purchase something in the future.2. Get them involved in the process. One of the first interactions kids are likely to have with money is in grocery stores or convenience stores. Talk to your children about what you’re purchasing and why those purchases are necessary. For example, you might explain that the grocery trip is specifically to buy food for dinner and that you are not there to buy anything else. You might also let your child help purchase the necessary ingredients. Give them $5 and let them see what the five dollars will buy to help cover dinner expenses. Let them choose between the more expensive name brand item and the generic, which item will they choose to buy? Introducing kids to how money works can help them understand commodities and how quickly money can be spent.
  2. Introduce the power of compound interest. Another great way to help children learn about investments and the power of compound interest is to teach them firsthand. Perhaps your child receives a weekly allowance for doing chores or receive money as a birthday gift. Let your child consider three options to use the money: 1. Save the money 2. Spend the money or 3. Invest the money. If your child decides to save the money, at the end of each month they earn $.01 for every dollar in their save jar. This cent represents the earned monthly interest in their savings account. Encourage them to keep adding to their savings account to cover a specific want or need. If your child decides to invest the money, at the end of each month they earn $.25 for every dollar in the investment jar. However, the investment jar may not be touched for a set period of time. The key here is to teach them how compound interest helps their money grow in investment vehicles. If your child decides to spend the money, the money is used and can’t be added to their accounts. Teaching children how and where money comes from, and how it can grow, will help them understand that there is not a limitless supply. If your children are older, say in their teens, you can apply this same lesson with real savings, checking, and investment accounts.
  3. Teach them about financial pitfalls like credit cards and high-interest borrowing. Older children need to be prepared to fight temptations to use credit cards and/or borrow high-interest loans. The key is to communicate what these financial tools are and explain the benefits and drawbacks of each. Certainly your children will use credit cards at some point in their lives, and credit cards can be very useful, but they should be aware to not overspend and to pay off balances each month. Likewise, discuss high-interest loans and what borrowing might mean for their future. Talk with your kids about their credit score and what this number means. Discuss how your children will pay for higher education costs and how interest rates will affect total repayment numbers. Again, the key is to have an open dialogue where children are taught how to utilize financial tools in a smart way.

For more information on financial strategies for your family contact our experienced financial advisors at TrueNorth Wealth.