When Should You Start Talking To Your Kids About Money? Hint: Probably Yesterday
I recently ran into a longtime friend (let’s call him Parker) and his father, who has a habit of telling embarrassing stories about Parker from his childhood. I complimented the dad on his car that he had just finished parking, which I happened to notice was bearing temporary tags. I couldn’t help but ask if he had any good Parker stories for me and he smiled, “speaking of new cars, I do.”
He continued,
“When Parker was about 3 years old, his mom and I wanted to get a new car. We had done all of our research on the car, selected which features we wanted, etc. The only thing left to do was to choose whether to buy the car in ‘cash’ or to finance our purchase. I wanted to buy it outright, while my wife wanted to finance the purchase so we’d have more cash flow. She asked me ‘What happens if one of us loses our job? I’d just feel better if we had some emergency cash in the bank.’ Before I could respond, Parker interjected ‘Just go to the money machine and get more money!’”
My initial reaction was wow, that’s funny, but my second thought was he was only three years old and he has ideas about money! With my curiosity piqued, I had lots of questions running through my mind. How old are children when they start making judgements about wealth? How do they formulate attitudes about money? How lasting are those attitudes? Are there certain experiences in childhood that make people better or worse at handling their personal finances later in life? As it turns out, our interaction with money during our early childhood has an enormous impact on how we regard and manage money as adults.
Surprisingly, children start developing their attitudes towards money before they even start school! In fact, according to a study in the Journal of Consumer Affairs by the time that most kids start school they have established notions about their role as consumers. As early as elementary school, children begin to recognize different brands and make judgements about others accordingly. The fact that children develop financial attitudes at such a young age means that parents should be proactive in teaching their children about money and aware of how they interact with money in front of their children.
Talking about money with anyone can be uncomfortable—but talking about it with your children, even more so. Unfortunately, many parents wrongly avoid these conversations with their children; while there are many factors that affect one’s financial attitudes, parents are the most influential. Children develop their financial attitudes by watching their parents, particularly in “consumption-related activities”, such as shopping. This seems obvious, but we’re often unaware of how observant children are of their parent’s actions and habits, including spending. We freely spend money in front of children, or conversely tell them something is too expensive, without giving a thought to how we are presenting ourselves as role models.
Not only are children’s attitudes about money developed at a young age, but they can also begin to acquire a good financial skillset in these early formative years. While money management skills can be learned throughout life, certain activities during childhood have been associated with being more financially competent as an adult. While there is no one “correct” method to teach your children about money, here are five tips to help your children develop healthy financial attitudes and money management skills:
- Be aware of how you spend money when you are with your children.
Most parents are aware of how impressionable children are and alter their behavior accordingly (e.g. avoiding cursing). However, they often overlook the way they treat money in front of their children and the profound impact this can have on how their child views money. This isn’t to suggest that you should change your shopping habits, but a simple awareness that your behavior will influence your child for years to come can change the way (in which) you approach shopping. For example, the next time you splurge at the store with your child, instead of treating it like any other day you can address it with a simple comment like “This isn’t something we do every day, but it is something we can do for special occasions.” And it can save you some money!
- Give your children an allowance and monitor how they spend their money.
Studies have shown that children who receive an allowance and have their parent’s monitor their spending, do a better job of managing their money as adults and report less financial anxiety. Receiving an allowance during childhood is great practice for having to manage your money during adulthood. Parental feedback is critical to this practice—letting your children know whether they’ve made good or bad decisions with their allowance reinforces the good decisions and discourages the bad ones. Additionally, you can incentivize your children to save their allowance by offering a match for the portion of their allowance they choose to save. In fact, those who are best able to delay gratification as children are usually the best at saving money as adults.
- Open a savings account.
Adults who had savings accounts as children are more likely to own other financial assets as later in life, such as stocks and bonds. While this may be correlational since children who grow-up in wealthy families are more likely to be wealthy in adulthood, there’s no harm in opening a saving account! The amount of money in the account isn’t as important as building the habit of acquiring financial assets. Good financial habits attained early in life tend to persist throughout adulthood.
- Have open discussions about money with your children.
Children and adolescents who discuss financial matters with and learn financial skills from their parents have healthier financial attitudes and lower levels of debt as adults. Additionally, they are more likely to consult with parents regarding important financial decisions throughout adulthood. Who doesn’t wish their kids to called them more often!
- Involve your children in charitable donation decisions.
Learning about charitable donations from one’s parents is positively associated with managing one’s own money transitioning into adulthood. This gives your children the opportunity to learn about charitable causes that are important to you and to develop their own charitable interests. This also allows your children to adopt healthy values about money and recognize the positive impact that they can have on others!
Daniel Ryan is a principal and portfolio manager at Alikos Wealth Management LLC located in Bethesda, MD, which focuses on serving high net worth individuals and families in the greater Washington, DC metropolitan area.
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