6 Ways to Increase Your Kids’ Financial Intelligence

July 31, 2007 by Marcel

My wife and I have been talking a bit lately about when the appropriate time would be to start educating our three year old about money. Thus far she has seemed too young to understand most money concepts, but she likes to put spare change in the money jar and marvel at how full it gets. While at the store, we explain to her that we can not buy the toy she wants because we haven’t set aside the money for it. She seems to be catching on, but we have a huge setback whenever any of her grandparents come for a visit. Overall, I think she has a fair grasp for her age on the basic concept of money. To that end, here are a few things my wife and I plan to do to keep her financially intelligent:

1. Start early

Never assume your child won’t understand anything you tell them. Keep reinforcing the basic fundamentals of money. One fundamental that applies at any age is the idea of limited resources. Don’t let them spend more than they have and explain before going to the store that there is a limited amount of money to be spent.

My wife and I plan to encourage our children to not only save a portion of their money, but to donate a fair portion as well. We hope we can instill this in them early so that it will carry with them the rest of their lives.

2. Be open with “grown-up” finances

Bring your children in to monthly “family finance” updates. Show them the income that is coming in and the expenses that are going out. Let them know why you are saving X% in a 401(k) or other savings vehicle, and ask them for suggestions on how to cut expenses/increase income so you can contribute more.

Admittedly, this tip takes a high comfort level in sharing personal details that your kids may share with their friends. If you find that sharing your income and net worth with your children is beyond your comfort level, at least share with them the generalities of your finances. For instance, instead of using dollar amounts, use percentages. This may be an eye opener for both you and your children.

3. Set goals

Show your children how good it feels to set a lofty goal and reach it. Let them set a goal of buying that Nintendo Wii game system with the discretionary part of their allowance. When they finally have enough to purchase the system, they will enjoy and value it more than if it was just given to them.

4. Give incentives to save

Despite your best efforts, your child may not be able to see the forest from the trees when it comes to saving. They may want to spend every dollar they have every time they visit the store. In order to mitigate this behavior, match portions of their saved money and explain how their savings will grow over time. Allow them to withdraw a portion of their contribution plus a little extra after set periods of time (i.e. 1 month, 3 months, etc). They may be spending a similar amount, but you can then demonstrate that their savings had grown so they have money left over.

5. Let them learn from mistakes

This idea comes from a post I read at AllFinancialMatters.com asking how hands off parents should be. If you think your child is making a mistake with the discretionary portion of his allowance, explain to them your opinion and let them decide whether or not to make the purchase. If they make the purchase and are later disappointed in their decision, remind them about the day they made the purchase decision and let them know they would have more money to spend today if they had thought things through before.

6. Explain the value of gifts

When your children receive gifts for their birthday or at Christmas, explain to them the value of the gift. This can be done by explaining how many allowances it would take for them to save up for the gift. This may not apply to gifts that are sentimental, but large gifts such as sports equipment and video games are perfect items to talk about.

In the end, I think that the best way to teach a child to live within their means and understand money is to set a good example. If you are trying to get your child not to splurge on a video game, understand that you may have to show him that you won’t buy that 52″ plasma TV you want unless it is in the budget. If you want to teach them to save, show them the percentage of your income that goes to savings. Don’t be complacent and think they aren’t watching, because they definitely are.

These tips are based on what may be my naive thoughts on educating children about money. I would be interested to hear from others who have direct experience with children of different ages.

18 Comments so far »

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Pinyo said

am August 6 2007 @ 12:37 pm

For someone with his first child coming, I must say that these are really valuable tips. I think there’s nothing wrong with sharing information with your child, and I think the ealier you teach them the better. Thank you for a wonderful post.
Millionaire Mommy Next Door said

am August 6 2007 @ 2:16 pm

Good tips. I especially agree with modeling appropriate financial behavior as parents. I also think it’s wise to allow children to make mistakes with money while they’re young– before the price paid is too high.
Shadox said

am August 7 2007 @ 1:03 am

Excellent article. I have three young boys, my oldest just turned 5. I have already started to gently teach him about money. It’s always a challenge to figure out how much I should talk to him about finance - it is important, but I don’t want to overwhelm him or over stress the importance of money.
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Bruce said

am August 8 2007 @ 10:47 am

Good tips. One of the things we always did with my three daughters was to give a budget for school supplies. They had to buy their school supplies, underwear, socks first and then got to buy their school clothes. They learned quickly that since they only had a specific total they could spend that three pair of no-name jeans for the same price as one pair of designer jeans was a better deal. They even went so far as to negotiate between themselves for one to buy one top and another a different top and then share it.
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J said

am August 13 2007 @ 11:34 am

I’m a 2nd year college student. I would have preferred more of an education from my parents with regards to budgeting and finances- they invest and don’t spend as much as the neighbors, but I wouldn’t call them frugal- they spend more than I wish they would.

One thing that they did do right was encourage me to invest. At age 13 I invested in the Nasdaq 100 ETF- and promptly learned my first big lesson in 2000. Better to lose $300 as a kid than $300k as a retiree, but the key point in all this is that at first my parents matched 50% of my investments, then later matched them dollar-for-dollar. Assuming that I didn’t withdraw the money from the brokerage account, it amounted to a free gift. They terminated this practice sometime around age 17, as the point was learned and with a part time job it was getting expensive for them.

I think another thing you should mention is instilling a fascination with saving, investing, and watching money grow- the power of compounding interest should something that gets hammered home very frequently, even at ages when kids can’t understand it. If you can get them hooked on personal finance, budgeting, and investing as a hobby, you’ve done your job as a parent.
Chief Family Officer said

am August 13 2007 @ 9:12 pm

This is great advice. I wholeheartedly agree with point #1, particularly since my not-quite-two-and-a-half-year-old understands far more than he is able to articulate. In fact, I’ve started pointing out price tags to him at the store and explaining that the $7.99 toy is not in our budget but that I would consider buying him a $.99 Hot Wheels or Matchbox car (in exchange for his patience while I complete my shopping). I also explain that I’m searching the clearance shelves for deals and stocking up on a sale item to save money by not paying full price later on.
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Jane Doe said

am April 27 2008 @ 8:04 am

I am glad that many people understand and share my concern for the financial education of my children. Nowadays the children have to know the value of the money and the value of the things that they can buy or recieve.
Nouveau Riche University said

am May 1 2008 @ 10:21 am

Teaching your kid the value of money is for sure something that needs to be done, but take care because this “mission” does not need to start at a very early age because it could irreversibly damage your kid’s system of values.
Paul "The Credit Card Debt" Expert said

am June 16 2008 @ 4:23 pm

I agree with the comment above. Money is important, but emphasizing too early will lead to materialism. Once a child has a job, teaching them how to budget and manage their finances is an important step.
Financial IQ said

am June 29 2008 @ 3:15 am

Great post. I especially liked the part “Be open with grown up expenses”.

It’s amazing how much and how fast our children can learn when we share with them real-world examples and case studies.

Personally, I let my children manage a small portion of the family expenses and they’ve done very well with it. I think the key is to give them some responsibility to apply their new-found knowledge.