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If you follow me, you’ve seen my “20 for 20” list. One of my goals for 2020 is to teach my kids how money works. They’re both 4, and they are growing up in such a different environment than Jeremy and I did. They rarely see any cash being exchanged, so they don’t really understand how money works. They know generically that mom and dad work everyday so we can “make” money (but no, we don’t actually “make” the money, we’re not a paper mill), and that we use that money to buy things we need and want, but I think the concept is difficult to grasp at this age, especially when I don’t know if they’ve ever seen us hand over cash for anything!
A study done at the University of Cambridge showed that money habits are formed in children by the time they’re SEVEN YEARS OLD. Geez. I decided we were going to get started on good habits when it comes to money even though the twins are only 4. Here are some simple tricks we are using in our house to teach our little kids how money works and how to manage money in a responsible fashion.
1. Be a good example
Don’t worry – this is by far going to be the toughest tip I’m including in this list. But you simply can’t expect your children to grow up with good money habits if they are constantly witnessing bad ones. This is something that I think a lot of parents take for granted. Our kids see and hear everything, and they understand WAY more than we give them credit for. Talking frankly with them about money is important, but leading by example is critical.
I often tell people who are just getting out of school or getting their first jobs that, as soon as they start getting a paycheck, they need to immediately split that money into different accounts:
- Everyday checking. This account is for paying day-to-day bills. This account should always have enough to cover your monthly expenses.
- Short-term (emergency) fund. This account is for when your car breaks down or you get sick and have to come out of pocket for your deductible (if you have a big deductible, you really should be looking into an HSA, but that’s a post for another time).
- Long-term savings. This account is money you generally don’t touch. Everyone should be striving to save 6-12 months of living expenses in this account just in case.
- Retirement. Any extra money should be going towards retirement in the form of IRAs, 401(k) plans, or any other tax-advantaged plans first, then into traditional investment accounts.
Once you’re in a good position on the above 4 categories, then you can start thinking about contributing to other categories like charity (I know a lot of people automatically contribute a portion of their earnings towards charity before saving for themselves, but I personally think you need to have an emergency fund before you do this) and college savings (seriously guys, don’t ever tie up money in college savings for your kids if you don’t have enough in retirement funds – there are student loans. There are no retirement loans).
The first thing I did was pull out the twins’ birthday money and gift cards that I had been hoarding for them so they could see the actual cash and the fact that cards can be used to pay for things too. Then I pulled out my laptop to show them how grown-ups keep their money.
I explained that one screen was all mom’s “saving” money, and one screen was mom’s “spend” money. All the minus signs are things that I paid for, so every time there’s a minus, that means there is less money in my account. Then I pointed out certain minus signs that were amounts going to charity, which means that was “share” money.
Sophie asked why one account had her name on it, so I explained that grandma puts money in special accounts for them to use when they want to go to college, and that college can cost a lot of money. She said, “I would LOVE to go to college! Why do I have more money than Noah?” Instead of explaining the concept of dollar-cost averaging, I just said, “Don’t worry, Noah will have more than you next week.”
Ok, enough about grown-up savings – I can talk about this for hours, so let’s get back to the point, which is teaching LITTLE KIDS about money. But I wanted to make sure we all realize that little eyes are always watching, so the best way to teach your children about money is to be a good example yourself. Part of this is explaining honestly how mom and dad manage their own money.
2. Explain how much things cost
You’re probably already doing this to some extent. You know when you’re at the store, and they say, “Oh mom! I love this so much! Can I have this?” You’re likely used to saying, “That’s too expensive,” or “Not this time; we’re already spending too much.” Well, these are your chances to explain in a little more detail. Show your child the price tag and say, “See, this doll costs $25; that’s a lot of money for a toy.” Go even further and start getting into opportunity cost – they may not quite get it, but I think you’d be surprised: “We are already buying you new rain boots, and we can’t spend more than $30 on this trip. If we buy the doll, we won’t be able to buy the boots even though you really need them for school. Do you think that would be a good idea or a bad idea?”
To get out of the well-known jam of your kids wanting something they can’t have at the store, check out this easy trick I use without fail.
3. Get a Moonjar moneybox
My specific goal for 2020 was to start a “Spend/Save/Share” jar for each of the kids, and I had been on the lookout for something like a piggy bank but with categories. I found these Moonjars on Amazon, and I bought one for each of the twins.
What I like about these specific piggy banks is:
- It’s already split into 3 separate categories.
- It’s see-through. Ceramic piggy banks are cute, but kids can’t see what’s inside and have no idea what it looks like when they’re money grows or shrinks.
- It includes a little passbook where kids can keep track of their totals and figure out how much should go in each.
After we decided how much to put into each category, I told the twins to think hard about something they really wanted to save their money for, and we would figure out how much it would cost. Noah decided he wanted a Statue of Liberty LEGO set, and Sophie took a little longer to decide. Later that evening, she announced that she wanted a pair of roller skates.
I explained how much each item costs, and that they need to save that much before we can buy them. Then we drew pictures of their “save” items and put them on their save jars.
In the interest of full disclosure, I drew the pictures, and the twins colored them. I am… clearly not the artist in the family. Hey, I got the point across.
I am planning on starting to give the twins a small allowance so they can manage their money. I know some people pay for chores, but we will probably just be giving them around $4 a week simply for the lessons on money management. My kids are pretty great for 4-year-olds at their responsibilities around the house, and they know that pitching in around the house is what everyone does – without pay!
And now we wait. . .
Ok, so I’ll let you guys know in about 30 years how this worked LOL. I kid, but I do expect that this will be an ongoing experiment for the next several years. I am excited that we are starting the process now, though.
How did you learn about money management, and what will you be doing to teach your kids how to handle their money?
