5 Rules When Teaching Kids About Money

As parents, it’s our job to have the occasional awkward conversation with our kids. For some parents, the “money talk” is not something to look forward to.

No matter how uncomfortable it may seem, teaching kids about money, especially from a young age, is critical.

Money facts for kids, such as the details of compound interest and adding dollars and cents, might come from school. But money values need to come home.

The sooner you have the money talk and start teaching kids about money, the better off they’ll be financially.

Spending: Teach Kid the Difference Between “Needs” and “Wants”

Teaching children to use money responsibly means teaching them the difference between buying the things they need and the things they want.

A very young child might have trouble understanding that he doesn’t need a toy car, for example, but that it’s something he wants to have.

The difference between wants and needs starts to become clear as children reach school age.

A trip to the store, whether it’s a clothing store or supermarket, can be a great place to point out a few money facts for kids.

For example, when you’re at the supermarket, you can show your 6-year-old a box of sugary cereal and ask him if it’s something he wants or needs.

Explain the difference – he doesn’t need the sweetened cereal to survive, but he might want it because he enjoys the taste.

Cover All Aspects of Money

Your kids might not be getting the big picture when it comes to money. They might see you spend it at the store, but they probably don’t see you save it or invest it.

When teaching kids about money, remember to cover all of the bases, including saving, bills, and other uses.

Teaching your kids about all areas of money is a great time to teach them about budgeting.

You can demonstrate how a budget works by placing a dollar’s worth of change on the table.

Use three dimes to show them than 30 percent of each dollar goes toward the mortgage. Use 2 nickels to show them that 10 percent of every dollar goes toward retirement, and so on.

The demonstration should help them see that you don’t only use money to buy items at the store.

Give Them an Allowance

Kids’ allowance can be a controversial topic.

Some parents don’t like the idea of giving kids money, others don’t like the idea of connecting chores to money. I’m all for giving your kids allowance for chores.

Paying your kids when they do work around the house lets them see that money and work are connected.

Connecting money and work from an early age means your kids won’t be dependent on you. They’ll see that you’re not there to simply hand them money when they need it.

You might notice that when kids work for their money, they’re a little more entrepreneurial.

Don’t Forget About Debt and Credit

A number of parents choose to skip over the money lessons on debt and credit.

I can’t recommend doing that, as kids need to understand how borrowing money works. They need to learn about interest charges and fees from a young age.

As plenty of kids end up taking out massive student loans to pay for college or using credit cards to purchase daily needs, learning about credit from a young age is critical.

One way to teach your children about how interest charges work is to loan them a small amount of money.

Charge them 5 percent interest. After they’ve repaid the loan, let them see the amount they paid back versus the amount they originally borrowed.

Remember to Let Them Figure Some Things Out Themselves

Your goal when teaching kids about money is to end up with kids who are financially savvy.

Your kids won’t get financially savvy if you hover over them constantly, dictate when to save or when to spend, and try to micromanage all of your kid’s finances.

It’s tough, but you do have to let your kids set their own goals and in some cases, make their own mistakes.

If your child is drowning in debt or keeps spending his weekly allowance on candy, you can step in and provide assistance.

But remember that your kid is going to enjoy learning about money more if you let him make his own decisions.

Kelly Anderson is a financial planner who blogs about financial advice you can use in your everyday life. Connect with her on Twitter, Facebook and Google+.