Many parents struggle to talk to their children about finances, but there are some simple ways to introduce children to good money habits.
Many parents worry about the right age at which to start teaching children about money. In reality, it is never too early.
Good habits are bred at a very young age. Understanding and managing your finances is no exception. And children understand financial concepts a lot better than many of us realise.
A study by the University of Cambridge found that by the age of seven, children will have developed ideas about money that they will carry through life. By the age of four, they already understand that merchandise needs to be bought and paid for.
Parents therefore need to be aware of the habits that they are encouraging at this young age. Developing good financial hygiene early will serve them well throughout their lives.
Here are five ways to teach your children about money right from the start.
1. Involve your children in “adult” activities
Children enjoy being “grown-up”. They like to feel part of what adults are doing. These provide opportunities to engage with them about what money is, how it works, and how to handle it.
As the Cambridge study notes: “The enjoyment of doing something with the parent, the familiar habit of the weekly shopping trip or the feeling of mastery in participating in ‘adult’ activities like going to the bank, provide sufficient meaning and motive for young children.”
Something as simple as letting your child swipe your credit card at the till when buying groceries, and explaining how this transaction works can have a meaningful impact. We take for granted the idea that everything has a value that needs to be paid, and that credit cards represent money, but children need to have these things explained to them.
2. Give your children an allowance
It’s one of the oldest pieces of advice for teaching children about money, but it remains one of the best. Giving your children an allowance is a good way to teach them about budgeting and saving.
A study by the asset manager T. Rowe Price, found that children who get an allowance are twice as likely to say that they are knowledgeable about finances, and a third more likely to feel that they are smart about money.
The essential benefit of giving children their own money is that they get to experience the concepts of spending and saving for themselves. This reinforces the conversations that their parents are having with them.
3. Allow your children to make mistakes
If you are going to give your children their own money, however, don’t then dictate to them what they should do with it. For the experiential learning to work, they have to be allowed to make their own mistakes.
The biggest lessons we learn are from the times we get things wrong.
While it may be tempting to bail them out if they overspend or make a poor financial decision, allowing them to face the consequences can help them learn valuable lessons and develop good financial habits.
4. Involve your children in family decisions
Many parents feel uncomfortable about talking to their children about how much they earn or the household budget. But even if you’re not willing to go that far, there are some simple ways to bring your children into the decision-making around family finances.
An excellent opportunity is a family holiday. Explain that there is a budget, and that the whole holiday needs to cost less than that amount. And then allow your children to be part of the discussion around how that budget will be spent.
This can be an incredibly powerful way to show how managing finances is often about trade-offs, and that you need to decide how you want to spend this resource. Since a holiday is a pleasurable experience, it also introduces the concept that money should be something that works for you.
5. Set a good example
Perhaps the most important way to teach your children about money is to set a good example. Children learn from their parents' behaviours and attitudes towards money, so it's important to model responsible money management and a positive attitude towards saving and investing.
According to research by the Money Advice Service, “Children who are more financially capable tend to have parents who role model financially capable behaviours at home, through explicit teaching (e.g. discussing where household income comes from, showing children how to check bank balance, setting rules around money, discussing budgeting), through demonstrating behaviours (e.g. parent saves often) and through fostering their child’s connection with money through giving money to their child regularly and giving their child responsibility for spending and saving decisions.”
Put another way, the best way to teach your children about finances is to have the kind of relationship with your own money that you would want your children to have with theirs.
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