Understanding how to teach your child the value of money has become a critical step of parenthood. As financial independence gets harder to be achieved, teaching your kids about money has become as important as ever:
The cold truth is that our kids will need more money than we did, and they will have less to rely on. Teaching your kids about money is the key to their survival. In this article, I will set out the first two critical steps all parents should take to teach their kids the value of money.
If parents don’t start talking to their kids about money, then there is a fear that they could struggle to face the increasing financial challenges that lay ahead of them.
Teaching your kids about money has so many benefits. It can help build their confidence and self-esteem. It also reduces their future worries about money, which can have positive impacts in terms of mental health.
Just these points alone should help encourage parents to talk to their kids about money, but there are more pressing needs for parents to start this conversation.
Money is already the number 1 stress factor for young adults today, and these stress points are not going away anytime soon. That is why it is so important to understand how to teach your child the value of money.
In this article, I’ll set out the reasons why these stress points aren’t going away and two simple actions that parents can take to ensure they are on the right path to being ready to face their future financial challenges with confidence.
1 – Why you need to teach your kids about money
Essentially, our kids’ generation will require more money than generations before them but have less money to rely on. This is not a promising scenario for them to be in! Let’s look at these two statements in more detail:
Our kids will require more money than generations before them
Homeownership in America is declining significantly in younger generations as housing costs skyrocket. It’s extremely difficult for young adults to get on the property ladder. Many are still living with their parents into their mid-20’s and early 30’s to save up for their own property. This problem is unlikely to go away any time soon.
The cost of tuition is also increasing at an alarming rate. Many of us will, however, continue to encourage our kids to go to university to access higher education and a more lucrative job. This means that when our kids reach adulthood, they could be starting with a higher level of debt compared to any other generation. Our kids will have fewer pools of money to rely on than generations before them.
There are several approaches you can go on how to teach your child the value of money. As you and your family progress on your financial literacy, your role as money coach will develop and so will your kids. The two strategies presented in this article are the foundations for several other steps that you can build on.
2 – Understanding the importance of teaching your kids about money
To set the scene, let’s consider our parents’ generation (those that are now grandparents to our kids). When they retire (or retired) they can typically rely on three pots of money to help them financially:
- Basic pension from the government (in most developed countries)
- Company retirement schemes (in most cases a generous benefit)
- Savings (their own plus any inheritance they may have received)
With these three pots of money, their “baby boomer” generation can enjoy retirement.
Now let’s look at our generation. We have the same three pots of money but with significant changes:
- Basic pension from the government – but we have to wait until we are older to receive it
- Company pension – but less generous as these companies are still having to fork out large amounts to cover the pension pots already committed to our parents
- Savings – but there will be less coming from inheritance as our parents and grandparents live longer and therefore spend more during their lifetime.
The above means that, all else being equal, we’ll have more financial challenges than our parents. You can probably see where this is going if we then consider the next generation, our precious kids. Therefore, teaching children about personal finance is something that must be done.
3 – The financial security of our kids
The financial security of our kids will be much more fragile than ours. Firstly they will likely still get retirement savings from a government pension, but no doubt they will be over 70 before they can access it.
Secondly, companies will continue to reduce retirement benefits as they look to control costs. I should know, I worked with many large corporate retirement funds. Truth is that seeing the reality of corporate retirement funds made me realize how important teaching our children the value of money is.
Thirdly there are ‘savings.’ Our kids are unlikely to be able to rely on receiving an inheritance from us as we’ll need all our money (and money from our parents) to ensure we survive through our long retirement and to fund old-age care costs. As our life expectancy rises so does the importance of financial planning and of having long term financial goals. At the end of the day, you can help your child by investing in your own financial well being.
4 – Simple actions you can take to teach your child the value of money
We are already seeing our parent’s generation releasing money from their houses via equity release schemes so that they can maintain their financial health, so even our family home may be gone.
Our kids will have to have their savings to survive. They will have less money than previous generations but yet need more than them. They need to be prepared, and with your help, they will be ready!
Let´s now jump to the two simple actions you can take to teach your child the value of money, and prepare them for a lucrative financial future with confidence.
5 – Action 1 – Start saving for them now – and I mean right now!
It doesn’t matter what form of savings you make initially, just start saving. It can be by opening a bank account, savings account, or investment account.
People say they “haven’t got around to doing the admin of setting up an account” for their kids. If that’s you, then just get a money box and start putting cash in it or create an “I owe you” (“IOU”) on a piece of paper or in a spreadsheet for them.
We can discuss the best ways of saving later, but right now, please commit to saving for your kids.
At this stage, it also doesn’t matter how much you are saving for them. Anything is better than nothing. Only save what you can afford but look to save something once a month.
Over time this money can grow, and you can top it up with any gift money they get from friends and family. The key is to start with something, regardless of the amount. Over time, this will form a habit that your kid will learn from.
To give you a flavor of the financial impact this could have on your kids, let’s look at an example. If you saved $20 per month (roughly the cost of buying a coffee a week) for your kid from birth until they were 18 they could have:
$4,320 if you just put the money in a box, or
$5,700 if you saved the money in a bank account getting 3% pa, or
$8,400 if you invested in a simple investment fund (assuming 7% pa return).
These are material amounts to help start adulthood. It also doesn’t account for any money they save themselves or get as gifts from friends and family over time. If you increase the savings from $20 per month to $150, you will have $63,000 at the end of 18 years with 7% returns per year.
6 – Long term regular small savings can provide your children a great financial head start
Small amounts of savings can lead to a large amount when they become adults. We are using time and compound interest to build the value of money for our children. It will provide them with a fantastic start from a financial perspective.
How many of you reading this would have benefited from such amounts when you reached 18 years old?
OK. Let’s take a pause here. I want you to state out loud that you are going to commit to action one and start saving for your kids now.
Do whatever is quickest and most comfortable for you right now – no excuses. Take out some money from your wallet/purse and say that’s for your kid(s) – put it in a box or write it down.
As I said earlier, you can refine how you save later on.
Right, that’s done! Well done – you are doing more than most parents out there. Feels good, right?
Now on to action 2!
7 – Action 2 – Commit to telling your kids about saving.
The next action is equally as easy and quick but much more critical.
Tell your kids that you are saving for them and commit to giving them updates on their savings over time.
Clearly, there is a lot more you can do to educate them, but just committing to updating them is already a big step.
By witnessing you are saving money for them, your kids will learn an essential life lesson about self-regulation and the time value of money. Most adults who are good with money will refer back to what their parents did.
Children learn by example. You should, therefore, make sure you let them know what you are doing to manage your money. As your children get older, share your financial success cases, as well as your financial issues. By doing so you will be going improving your financial wellness awareness and teaching your kids about money at the same time.
A piggy bank is a good way to teach children how to save. Kids learn from practical actions. You can give your children some coins as gratification for small chores to incentive them to save money. Alternatively, help them to set up a lemonade stand and challenge them to run it responsibly.
If you have set up a bank account for them with automatic payments, put in a reminder each year to tell them how much is in there. Keep in mind that your utmost objective is to teach your kids the value of money, try and be creative to make it fun.
For our kids, we don’t refer to money but replace money with trees. We tell them we are helping build a ‘forest’, and each year we tell them how many trees they have in their forest. They can then visualize what this looks like.
8 – When the subject is the financial future of your children, lead by example!
Saving for your kids in secret doesn’t teach them anything. They will get one lesson on the day you hand the savings over. At this point, it will be like winning the lottery for them, and we know those lottery winners don’t always keep their money!
If your kids see their money (or ‘forest’) has grown over a long time, they are less likely to chop it down and more inclined to nurture it and just take some seeds.
Telling your kids about their savings also makes you accountable for looking after their money. I’ve heard stories of parents who have dipped into their kids’ savings or piggy banks. Once they know you’re less likely to see this as an option (after all, it’s far easier to take something from someone who doesn’t know they have it in the first place).
Lastly, by them witnessing you saving, it will hopefully trigger them to take an interest in money, ask what they could do with it, and how they can grow it and take ownership of it.
9 – Teaching your kids about money – who is doing it?
OK – have you have now committed to two simple but strong actions. You might be thinking that a lot of parents must already be doing this, but in fact, that is not the case at all.
It’s not clear how many parents are saving for their kids (action 1), but of the minority of savers, only 1 in 5 tell their kids about it (action 2).
So if you do take both actions, then you are ahead of the vast majority and having given your kid a definite advantage.
Well done! Tell your friends and have a party. Let’s increase the percentage of parents saving!
You’ve done it!
That’s two super simple actions that will make a massive difference to your kids’ life. Please don’t underestimate what you’ve just done. Small steps, yes, but which will result in a powerful outcome. Just watch those savings grow and the knowledge your kids gain.
10 – Don’t let this be the end of your journey to teach your children the value of money
Now that you understand how to teach your children the value of money, you need to consider some next steps:
- It is important to ensure that you get the most of the savings you are making for them.
- Continue teaching your kids about money management whenever there are opportunities; this can be done by playing shopkeeper at home or getting them to save and spend their pocket money (allowance).
- Financial education is a long term goal, steady small steps will take you and your family a long way.
- As your kid grows, start introducing more advanced topics, like budgeting, setting financial goals and using credit cards.
Last but not least, teaching kids about money is also about how you manage money. Invest in your finance education as this will open up other ways to teach the skills your beloved ones need to make informed decisions about money. It takes time to understand how money works, but it’s your responsibility to help your kids to do so.
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About the author:
This article has been written in partnership with Will Rainey, from Blue Tree Savings.
After 17 years of working as an investment advisor to some of the largest asset owners in the world (retirement schemes, central banks, insurances), Will Rainey is now the Founder of Blue Tree Savings. The Blue Tree Savings Blog provides articles and guides to help parents teach their kids about money. Blue Tree also provides a tool to help parents use their existing investment account to save for their kids, with their savings being shown as Blue Trees so they can watch their forest grow as they save. Will’s mission is to help as many parents as possible to teach their kids to become Financial Superheroes! You can reach will by e-mail, on Linkedin and Facebook.