How To Teach Children About Money Management and Financial Literacy

I’ve made some bad financial decisions and wish a knew more about finances long ago. I also experienced financial hardship, losing all income for several months, which gave me a new perspective — quickly.

A hard lesson to learn, but one I am applying to myself — and my kids. With the cost of living rising exponentially where we live, there is little (if any) room for kids to learn about money management the “hard way”.

Finances are an open topic of conversation in our home. My kids sit with me as bills are paid and we check the graphs highlighting daily hydro usage.

Children can understand transactions at a store, but in the world on online payments and debit and credit cards where accessing funds seems so easy and far less tangible, understanding where the money comes from just might be a far more challenging conversation than “where do babies comes from?”

What effort goes into a purchase?

How is money made?

What is a living wage?

How do I earn enough to cover the bills when costs are continually rising?

The questions that need legitimate answers are endless. Each question signals a learning opportunity to help children develop their financial literacy.

In this article, I ask parents three questions and provide practical advice from my lived experiences. Teaching children about money management and financial literacy is a complex but achievable — let me show you how.

When my kids started a paper route, we immediately transitioned the cost of goods to time spent delivering papers — to earn the money.

“That LEGO set is a two months of delivering papers, is it worth it?”

It’s amazing how quickly my youngest stopped asking to buy something when shopping for a birthday present for his friend!

Does your child know the difference between wants versus needs?

This is a great starting point and an important basis before introducing a budget. Of course, a child’s definition of “needs” versus a parent’s will be very different, so it will take time to work through this idea.

Understand the value of saying “no” and the reality that overindulging your child can lead to materialism — which studies show reduces life satisfaction and increases rates of depression is critical.

In saying “no” and educating children on “needs” versus “wants” parents are also introducing their children to “delayed gratification” which it another valuable life skill.

Are you teaching delayed gratification?

Delay of gratification, the act of resisting an impulse to take an immediately available reward in the hope of obtaining a more-valued reward in the future. The ability to delay gratification is essential to self-regulation, or self-control (Britannica).

Delaying certain purchases and instead saving money is essential to achieving financial goals, especially in the era of “buy now, pay later schemes”. For example, without this action it is impossible to have a down payment for a home.

Have you heard of the marshmallow experiment? A famous study conducted in the 1960s, presented the “marshmallow experiment.” Walter Mischel offered four-year-olds a marshmallow and told them they could eat it immediately or wait until he returned 15 minutes later, at which point they would receive a second one.

Some of the kids waited, most did not.

Researchers followed the children and found that 40 years later, those who demonstrated delayed gratification performed better academically, earned more money over their lifetime, and were generally healthier and happier. Further, they had lower levels of substance abuse, lower likelihood of obesity, and were better able manage to stress. Pretty significant results.

Allowing kids to make and spend their own money is a great tool for parents to teach their children about delayed gratification. Maybe you don’t say “no” to that LEGO set and you have your children complete x, y, z, over a period of several months to earn it as a way to say “yes”?

Do you work as a family to develop intentional spending habits?

Behavioural economist Dan Ariely shares that money is all about opportunity and opportunity costs, “Every time you buy a cup of coffee, you should be thinking, ‘What can I do better with four dollars?’”.

Many people finding saving hard and spending easy, unless you are my oldest child. He is currently saving for a house and insists that he will never need a car and will ride a bike instead because it’s more cost-effective.

On a personal level, I made a commitment some time ago that I would only buy coffee out if it was attached to an experience — catching up with a friend. To me, the four dollars was not worth a cup of a coffee but four dollars was worth time with my friend on a rainy day. This was a late lesson I learned and I can only imagine the difference if I was more intentional with that money many, many years ago.

Graham Stephan talks about this on his twenty cent cup of coffee on his You Tube Channel — constantly. This is just one example, but it’s one very common example where so many people, I believe, spend money unintentionally.

If the spending was redirected it would add up to big savings, e.g. $4 x 3 (days a week) x 52 (weeks a year) = $624. This is typically a habit that forms over careers — I would much prefer setting aside the $3120 for a family vacation every five years over a that passing cup of coffee; how about you?

This is intentional spending.

So, how can parents inspire this lesson in our children? I am glad you asked…

1. Determine a common goal
   Determine goal(s) and how much is needed and over what time frame. Calculate how much needs to be saved per month and per week to achieve the goal. Write this down. For my family, this is flights to Germany to visit family we have not seen since before the pandemic. Maybe it’s a trip to Disneyland for yours.
2. Understand where and what you are spending your money on and reflect
   This is a really hard one to do … but worthwhile. Because of its challenges, it’s all the more beneficial to form as a habit early on for your children: where and what you are spending your money on? One suggestion for parents is over a set period, write down every amount you spend and what you spent it on. It’s a helpful exercise and can be quite enlightening. Your leadership by example with support your children in this endeavour.
3. Work out if you can realistically achieve your goal. Adjust your spending (without sacrificing too much)
   Based on what you need to save and what you are spending, is your goal realistic? Reflect on your choices for where and what you are spending your money on. Do they align with your goals? For children, this is typically simplified and the focus remains at step one with the action being taken to save towards their goal. Having children become more aware of the decisions their parents are making, helps to instill the complexities that will be critical for them to learn as an adult.
4. Unintentionally save intentionally
   There are several ways you can do this. I find one of the simplest ways is through a “set it and forget it” approach with automated deductions into a savings account. Review this savings with your children, so they see the progress being made.

Raising children is hard work. Teaching children about money management and financial literacy is a complex, but achievable, task when you make a concerted effort to applying age-appropriate lessons as opportunities naturally present.

Finances do not, and should not, be a “taboo” subject for children. While there is a balance to not transfer undo stress onto kids, what if finances were not a major contributor of stress in your life? What would that mean for you? Do you want that opportunity for your children?

What is your approach to developing your children’s financial literacy? Let me know in the comments.

My family is a single-income family in the Pacific Northwest, where cost of living is high. We’ve been through our share of financial adversity and navigate life homeschooling our children — one with special needs who is unable to attend a “traditional” public school. The author, “mom”, hold s a Masters degree in Professional Communication and writes about parenting, personal development, life lessons in both short and long form to educate, inspire — and hopefully make someone’s day a little brighter along the way.

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This post was previously published on MEDIUM.COM.

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