Talking to Your Kids About Money is Healthy

Worrying about money can be stressful and harm both your mental and physical health. Money is the biggest source of stress for 65% of Americans, according to a MarketWatch survey. About 41% of survey respondents said their mental health has been damaged by financial anxiety, while more than half have lost sleep and 38% gained or lost weight from fretting over money.

Poor financial habits — like lack of a household budget, overspending, and using credit cards irresponsibly — are often cited as the cause of money problems. Eight in 10 U.S. adults feel they would be better off today if they had learned more about managing money in school, a Ramsey Solutions poll found. Only 17% said they took a personal finance class in high school. About half of Americans are financially illiterate, studies have found.

Vermont’s schools include personal finance in their curriculum, but parents still have a large role to play in helping their children to become financially literate. April is Financial Literacy Month and it’s a great time to talk with your kids or grandkids about money. You can help them adopt good financial habits, so they’ll have less stress about money as they get older.

Teaching Basics Early

By age 3, kids can understand basic concepts about money. By age 7, they’ve already formed some money habits. So, it’s important to start talking about money with your child early in their life.

If you have young children (ages 3 to 5), you can:

• Introduce them to the value of money by teaching them to identify different coins and bills. Always closely supervise toddlers to prevent them from swallowing coins.
• Help them connect money with the value of goods by playing store. Let them ‘shop’ for items like fruit and cereal, paying for it with pretend money.
• Involve preschoolers in household grocery shopping by letting them help you make a shopping list and find coupons. At the store, ask them to look for items on sale or that you have a coupon for. Talk to them about how to save money on groceries and ways to stick to a food budget, such as avoiding impulse buying.

Income and Savings Concepts

Between ages 6 to 8 is a good time for kids to start learning the concepts of earning income, saving, and spending their money wisely.

• Offer to pay them an allowance in return for performing tasks around the house or making achievements at school. Be sure to discuss your expectations in advance, so they understand what they must do to earn their allowance.
• Help your child open a savings account so they have a safe place to put their money. Take them to the bank so they can see the process of opening an account, making a deposit, and meet the people who work at the bank.
• Encourage your child to make regular deposits into their savings account. Help them to decide what portion of their allowance to save and show them the monthly account statement so they can see their balance growing. If the bank makes interest payments, be sure to point it out so your child sees how savings can generate income.
• To motivate your child to save, discuss with them the importance of setting a goal, such as saving up to buy a bicycle. Create a simple budget with them, so they’ll know how much of their allowance they can spend and what they need to save every week or month to reach their goal.
• Expand on the concept of saving by telling your child why saving is important to you and what it has allowed you to accomplish in your life. For example, you can tell them how you saved up to go to college, or how you saved to buy a home. Be sure to explain the trade-offs you made to save money, like bringing your lunch to work rather than eating lunch at a restaurant.

Comparison Shopping and Investing

The preteen years (ages 9 to 12) are when you can talk with your child about more advanced financial concepts, such as teaching them about comparison shopping, debt, investing, and charitable giving.

• Show your child how to evaluate items they are considering buying, including comparing prices, sizes, and quality between similar items. For food shopping this could involve comparing the differences between store brand and name brand items. At the grocery store, teach your child how to check shelf labels to determine each item’s per unit cost.
• Discuss the differences between wants and needs, and how that helps determine a budget. Share your household budget with your child, pointing out mandatory spending such as rent or a mortgage payment, and how that is different than discretionary spending like eating out or going to a movie. Give your child the task of dividing their own budget into wants and needs.
• Describe to your child what loans are, how they can be used, and why lenders charge interest on money that’s borrowed. Talk about any debts you have, like a car loan or a mortgage, and what you are doing to pay off those debts. To help your child practice responsibly handling debt, make a small loan to help them buy something they can’t afford on their own. Decide how long the loan will be for, what interest rate you will charge, and how much your child will need to pay back every month until the debt is paid off.
• Introduce the subject of investing and the stock market by having your child pick a company they are familiar with (such as Disney) and then follow its stock price to see how it changes over time. You can also look up dividends that the company pays to explain how shareholders can make money by investing. If you have investments, discuss those with your child so they can see a real example of how investing works.
• If you support charitable causes, discuss your giving with your kids. Explain the reasons why you do it and involve them in the process of making donations. If they are interested in giving on their own, encourage them to choose charities they want to support. Help them divide their earnings into “spend, save, and share” categories. When they are ready to give, assist them with the online process or if the charity has a nearby location, take them there so they can donate in person.  

Putting Concepts into Practice

When your child enters their teenage years, it’s time to put the financial concepts you’ve taught them into practice.

• Encourage them to find a part-time job after school or on weekends, so they get the satisfaction of earning their own money from outside your household. If your child has an entrepreneurial spirit, help them start their own business. It could be something as simple as running a lemonade stand or doing lawn care, or as advanced as website design. Check out these 28 business ideas for teens.
• Let them practice financial responsibility by using a credit card. Secured credit cards require a deposit in advance, which serves as the credit limit. With such a card, your child will learn about making monthly payments and the interest rates charged by credit card companies — without risk of spending beyond their means. Be sure to review the monthly card statement with your child so they understand the importance of managing credit card debt.
• Set up a custodial brokerage account, which allows your child to hold investments like stocks, bonds, and mutual funds. Let your child choose some small investments to make, such as purchasing a few shares of a company’s stock, and then periodically review the account statement with them so they can see their return on investment.
• Explain the importance of getting an early start in saving for retirement, and how money set aside now will grow over time with compound interest and investment returns. If you have a retirement account, review your account’s monthly statements with your child and discuss the reasons behind the investment decisions you’ve made. If you want to take it a step further, help your child open a Roth IRA so they can start saving some of their earned income for retirement. Roth IRAs can be opened at any age.    

Be Open with Your Kids About Money

You can teach your kids how to save and be careful with their spending, but don’t overlook educating them about the negative impact that financial problems can have on a person’s health. If worrying about money has caused stress in your life, share that with your kids and tell them how it has affected you. Being open with your kids about your personal money experiences is probably the best gift you can give them, as it can help them make good decisions that minimize financial stress in their lives.