Educating kids on money is not generally a subject taught in Australian schools; in fact it’s not until late primary school that some of the basic formulas for calculating simple interest enter the curriculum.
Unfortunately at this age, working out the interest on $100,000 at 4% over a ten year term is not an exciting or really a relevant topic for a child who is easily distracted by the latest computer game.
There appears to be a disconnect between this form of primary teaching and the practical application required for a child to apply the principles in their own world.
However, that’s no fault of the education system nor the teachers themselves, this is where we as parents or guardians have the opportunity to teach our children the intricacies of money and how to earn it, save it and invest it.
Let’s face it – we all want the best for our child in every sense of the word. Teaching your children about money and how to best use it can be one of the greatest investments in your life.
Teaching personal economics can prepare your child to learn more about economics in general and how money is used in greater society. Something as simple as a child doing household chores for an allowance to save up for a prized video game or other items will assist in leaps and bounds.
This respect for earning and saving can translate into a good work ethic and the likelihood of fiscal responsibility throughout adolescents.
Where to start? From what age can I teach my child about money?
Teaching your child about money can begin at an early age, even before they begin school. Young children can learn simple concepts from their parents through involvement in daily activities – for example that money can be exchanged for toys and food.
There are five main concepts of teaching personal economics to children: teaching what money is, the different denominations of Australian currency, how to count the dollars and notes, how money is used in everyday life and why money is important. Teaching your child the denominations of coins and notes naturally leads into learning about counting. After children can add and subtract the value of coins and notes, they can learn about saving money, using money to make purchases, and making a personal budget.
Teaching kids what exactly money is
Show your child how to identify coins by color, texture, size, and value. Open your wallet, show them each type of coin and note (although if you’re like me and never have real money in your wallet, it’s best to take a trip to the bank first.) Now is also a good time to start the first piggy bank. My 18 month old daughter receives all the coins out of my husband’s wallet at the end of each week and every Friday she runs to get her piggy bank out of her room to deposit each coin into one at a time. As she places each coin in we count “1, 2, 3…” Eventually we will count the money by the denomination, but for now the excitement of counting each shiny coin is keeping her interested in money.
Teaching the different denominations of each currency
Once your child can identify what money is, they can begin to learn the value of each type of coin and note. To help them associate the values, try a role play scenario of buying items in a store. Try lining up four or five items at the ‘cash register’ and allocate a value to each item, maybe a banana could be 50 cents, a book 20 cents, etc and ask your child to choose the appropriate coin to pay for the item.
Teaching how to count money
After children learn to recognize the different denominations of coins and notes, you can use money to reinforce some basic age-appropriate math concepts. Once they know how to add and subtract, you can use those concepts to teach them about saving money. Try a piggy bank scenario and add up the currency as each coin is deposited, or alternatively write down each coin’s value as they are placed in and ask your child to add up the total.
How money is used in everyday life and why it is important
Now is the time for some real life examples (with a bit of preparation first.) Visit the bank and make sure you have a wallet with various denominations in it, then take your child to the supermarket for a small grocery shop (Tuesday morning about 9:30am I’ve found to be the most serene for your sanity’s benefit.) As each item is placed in the basket ask your child to write down how much each item costs on a piece of paper, five items will do. Ask your child to add up the total value of all the items in the basket and then take them to the checkout.
At the checkout, if everything has scanned correctly make sure there is some positive reinforcement for your child working out the total. Following that, ask your child to select the correct money for the total and have them hand it over to the checkout staff. If everything worked out successfully, remember to reward them, if there were a few hiccups try this exercise again at another time, but reward them for trying.
The grocery shop might seem like a very basic example but it can cover a lot of lessons in personal economics. Firstly it helps the child associate a value to an item; you might be surprised at your child’s reaction when they hear that their favourite ice-cream costs $8 a tub. It also allows them to utilise their maths skills when adding up the total and when counting out the currency to pay for the total. It is effective is teaching them need vs. want if you add to the exercise by telling them they can choose the items but they must only spend within a set budget. And it is also effective in teaching them how food is a privilege that they need to pay for (instead of it magically appearing cooked in front of them each evening, which reminds me… I really need to take my husband grocery shopping more often).
What your children learn from real life money experiences will only translate positively to their financial experiences as adults.
Teaching kids the importance of earning money
Is an allowance a reasonable tool in your child’s financial education? How could this link to teaching your child about the value of money?
A hotly debated area, allowances. I had an allowance as a child, and my parents linked it to chores being done around the house. As a result of this I became familiar with money from an early age and developed a means of earning and saving it. Children, in general, tend to be very excited at the prospect of having their very own money, however, the concept of an allowance must not be seen as a free hand out on a weekly basis.
It should be a means for them to work hard in order to receive money in return. It is believed that if an allowance is given for no specific reason it can be the cause of over spending and debt when older.
If your child can understand that an allowance will come if they work hard, you are now in a position to find ways and means to educate your child about working hard in order to earn money.
My personal preference when the time comes will be for an allowance to serve as the positive reinforcement for a task or chore’s completion. I feel this allows the child to understand the concept of ‘earning’ an income. Once you have decided which way you want to proceed you will need to decide what a reasonable amount for an allowance is. I would recommend considering the age of your child and what they could potentially buy with the allowance. For example, you will likely struggle to teach your child to save up for expensive items if they receive half the item’s value in an allowance each week and likewise if the allowance is too small, as the motivation to save will dwindle after a couple of months. In today’s money for my child (whom won’t be receiving an allowance for several years yet) I am going to allow $10 a week for completing five tasks = $2 per task.
The type of task should also commensurate with your child’s age and could range from very small things for smaller children such as helping mum feed the pets or watering the flowers or putting their clothes in the laundry hamper, just ensure they associate completing the task with the allowance as the reward. As your child gets older, you can start to extend what they are required to do in order to earn the allowance. This is now your chance to teach them how they can actively help the household out while earning money for their goals and savings.
Getting them excited about money, opportunities to spend, save and invest
Now that your child understands money and how it can be earned, they are likely to be excited about earning as much as they can. This is your chance to show them what they can save for and the best way to do so.
Using the good old jam jar to save money can be very fun. It allows children to see their money adding up and also serves as a great place to add their allowance as they earn it. After a successful week of helping with chores, make time so that both you and your child can physically add the allowance into the jar. This should an exciting time for both of you and a chance to congratulate them on working hard for their money.
Try imagining you were a 4 year old. Would you want to save for university one day or prefer to save for your next trip to the lolly shop? Though the money they earn would be useful for a long-term outlook, it is better to start small and work your way up. Saving for the trip to the shops is perfect for smaller children as it has an immediacy about it that helps them get excited.
You could entice them into saving money by implementing some of the more interesting ways to save cash.
As they get older you can help them transfer these goals to bigger projects. Toy cars they want, their second bike, their first car, their home deposit and so on.
Help your child to develop good saving habits from the start by setting out budgets for big purchases. Children may spend their money on lollies at first, but once they realise that long-term saving can result in something like a new lego set or doll, they’ll be able to put their (financial) nose to the grindstone. If Christmas is coming up, offer to contribute a portion should they reach their financial goals.
Help them to invest
Making your money work for you is a helpful skill, and utilising things like compound interest are too often not explained to teenagers in context. If they’re saving for a big trip, encourage them to research where best to save their money. Would a term deposit work best? Or a high interest savings account? Then explain how compound interest can help build on your savings.
My Dolomites account was a stalwart of my childhood, and the main reason why I manage to save now. I loved the money tin that came with the account but most of all, I loved the feeling of positive affirmation every time I could deposit a bit of money. These days there are other banks and financial institutions that have accounts specifically targeted at encouraging young children to save, check out your local branch for what is available for your children. Explain to your child the benefits of each account, and each investment idea. If your kids are a bit older, talk to them about term deposits or saving accounts.
Helping your kids to understand credit and the world of debt
Credit cards are such difficult things and knowing how best to introduce them to your child is a really tough thing. Personally, as someone who struggled with credit card debt, I can see the value of introducing the use of credit, though I’m fairly sure I’d pair it with some pretty serious warnings. Prepaid credit cards might be a useful tool to introduce credit without your child landing a bit too much plastic fantastic time. Or once your child has secured some part time work and is earning an income of their own, you could allow them to apply for a credit card with a nominal credit limit. Teaching your child about compound interest with respect to savings will form the basis of teaching them about debt and the consequences of only making the minimum repayment.
Before you begin, ensure that they know the difference between ‘borrowing’ and ‘actual money’. Ideally they should be well aware that any money that is borrowed will have to be paid back at some point and will often take more then they borrowed to pay back.
Debt is something every household should know about, and children (especially adolescents) need to understand what can happen when it gets out of control. It may be an extreme, but show your child how it’s done when you pay a bill or do your tax. These are essential life-skills that get minimal attention in education.
Summary for those wanting to teach kids about money
The more communication around money issues with your child, the better they’ll be prepared. Using the tips above, your child should be well on the way to learning about money. In the end how a child manages their finances will be largely derived from the example of his or her parents. Demonstrate restraint in how you use money, and they are likely to learn from that. It’s not enough to talk about the starving children in Africa at dinnertime; instilling a sense of the real value of money in your children is essential.
Piggy banks, budgets and savings goals are all important parts of growing up, and becoming an adult who can function financially. It’ll help you financially as well if your children have an understanding of personal economics, as it’ll decrease the likelihood you have to bail them out of a $1000 phone bill any time soon.