Most money habits have already been formed by age seven, according to a Purdue University study. So parents, grandparents, and caregivers pay attention—this one is for you! As you know, children learn through observation and imitation. It’s no surprise, then, that by age three, they’re already grasping basic money concepts. Simply put, your opinions and behaviors around money will greatly impact how your kids manage money for the rest of their lives.
Now, ask yourself: Based on my behavior, how will my child view and use money?
If you’ve racked up credit card debt buying fancy clothes and high-end electronics, your kids will see that. If you take them to the bank each week to deposit money in your savings account, they’ll see that, too. In this article, we’ll discuss what your behavior teaches your kids about money. More importantly, we’ll provide tangible advice on how to teach your kids about money and instill healthy financial habits that they can use for the rest of their lives.
For better or worse, how you behave with money impacts how your children will behave with money—as children, and, eventually, as adults. One study by T. Rowe Price presents some intriguing statistics about how parents’ negative and positive financial habits impact their children’s habits:
Of parents who’ve declared bankruptcy before, 71% of their children spend money as soon as they get it.
Of parents who have significant credit card debt, their children are more likely to expect them to buy things they want.
Of parents who are reluctant to discuss money, 70% of their children say they hear different things at school regarding personal finances.
Of parents who have multiple types of savings, only 40% of their children spend money as soon as they get it.
Of parents who let their kids manage their own money, only 30% of their children feel ashamed to have less than their peers.
Of parents who let their kids manage their own money, 91% of their children say they set a good financial example.
So, what does this teach you as a parent?
The ultimate takeaway is that the best way to teach your kids about money is by focusing on communication, empowerment, and setting a good example with your own behavior. Your children are more likely to develop smart money habits when you talk with them about money, let them take responsibility for their finances, and teach through example by being a good role model.
According to financial experts, knowing the difference between needs and wants is vital to getting ahead in your financial health. Your behavior should demonstrate to your kids what’s essential and what’s not, with the ultimate goal of emphasizing the importance of saving.
Remember, one of the most famous budgets, the 50/30/20 budget, divides expenditures into three categories.
Emphasize to your child—through your actions, as well as your words—how a household budget allocates money for necessities (like a mortgage), luxuries (like travel), and savings (like your 401k). Let’s take a look at two scenarios: Each one details a different approach to handling wants and needs with your child.
You need a new refrigerator, so you head to the electronics and appliances store with your nine-year-old son. Before leaving, you don’t set a budget or discuss that all you’ll be getting is the fridge. After purchasing the fridge, the two of you stroll by the TVs. Your home already has a television, but you and your son feel that you need a better one for the game room. You end up spending $500 on a new TV—an expense that wasn’t planned or necessary.
The lesson: By setting an example like Scenario A, you demonstrate to your child that buying a luxury item on a whim is perfectly fine. It shows them that giving into impulses is okay. Sure, $500 may not be a significant expense for all families. For some families, however, $500 could make or break a monthly budget and should go toward necessary expenses like groceries, utilities, education, and savings.
More importantly, however, this doesn’t set a responsible example. By conflating wanting a better television with needing a new television, you teach your child that simply desiring a new item—no matter how expensive—is justification enough to purchase it.
You go to the grocery store with your eight-year-old daughter. Before going, you let her know that you have a set budget. First and foremost, you must get the things you need including food, cleaning supplies, and medicine. Then, if there is money left to spend, you can get some luxuries, such as ice cream, a toy, or other treat. At the store, your daughter helps you find all the items you need. After accounting for everything on your shopping list, you end up with $10 leftover to spend. Your daughter gets to pick out a luxury item up to $10 and chooses a new coloring book for $5 and a pack of pencils for $1.
The lesson: By setting the example shown in Scenario B, you demonstrate to your child the importance of always prioritizing needs over wants. Because you entered the grocery store with a set budget and shopping list, you got exactly what you needed—and had a little leftover.
Additionally, because your daughter didn’t enter the store with the expectation of getting an extra item for herself, the coloring set feels like a treat. The benefit of sticking to a budget includes being able to afford the things you need and treating yourself once in a while when you have money left over. No guilt, and no unnecessary overspending.
Think about this: The average American home has 300,000 items.
What has caused this madness?
According to University of Cambridge research, a range of environmental factors has led to our never-ending quest for stuff. These factors include peer pressure, media influences, nonstop advertising, and, perhaps most importantly, parenting practices.
Thankfully, your parenting practices can teach your child the proper path to responsible consumption. They can also help your child avoid the pitfalls of mass consumerism, including overwhelming debt and an excessive focus on ”keeping up with the Joneses”.
Let’s take a look at two different scenarios. These detail how a parent’s spending habits can help instill either wasteful or responsible values in your children.
Your home has all the newest toys and electronics. Your closet is filled with expensive clothes, shoes, and jewelry. You’ve got two fresh-off-the-lot cars in your garage. Somehow, however, you’ve neglected to put money into your 10-year-old’s 529 college savings plan or your retirement fund. Instead, you’ve racked up credit card debt on things you could’ve lived without.
The lesson: As detailed in an article published by Psychology Today, emotions are what drive our desire for brand-name products. When you give in to your desire for the newest things, your behavior sets the example that it’s okay to give in to spending impulses. You teach your kids that personal worth and happiness rely on having material possessions.
Perhaps more detrimentally, you haven’t shown your children the value of investing for the future and taking steps to be financially secure. As nice your car may be, it cannot pay for your child’s education. Setting the example of putting immediate wants before long-term goals can have a serious impact on your child’s ability to handle money as an adult.
You’ve made creating the household budget a family activity. Each month, you show your teen daughter and 9-year-old son how your family’s income is put toward necessities, savings, and luxury items. You set strict guidelines on how “want” items are bought, being sure to explain opportunity costs (i.e., if you buy this, you can’t have that). To instill good money habits, you also:
Allow your children to earn money through work or household chores
Show them how you use leftover money responsibly, such as donating to charity, saving more for education, and investing for retirement
Teach them the value of compound interest by letting them take control of their personal savings and investments
Demonstrate the importance of saving for things they want (i.e., requiring your teen daughter to save money for an upcoming concert instead of swiping your credit card)
The lesson: You teach your kids that money is a tool used to take care of your family, help others, secure your future, and even have fun (without going into financial ruin). You’ve shown them that income is not to be wasted on emotion-driven shopping sprees. You’ve also set the example that money is to be used to realize long-term goals. For instance, if your child wants to be a doctor, you may ask them to help you save (or come up with a savings plan) for medical school.
You can set your kids on the right path financially by showing them how to use money wisely. This begins by showing them how you use your money wisely. If your children observe you being financially responsible and see the real positive impacts that has on your family’s lifestyle, you’ll have a positive influence on their money habits for years to come. It’s vital to teach your children about money through hands-on lessons that put them in the driver’s seat. From piggy banks to checking accounts, let them manage their money. Allow your children to fail (within reason) and try out new ideas—they’ll learn from their mistakes and see greater success in adulthood.
You want the best for your children. You want to equip them with the right tools for success in all areas of life, including their financial health. You also want to teach them to take care of loved ones and give back when they can. Ultimately, this all starts in childhood by teaching—and showing—them how to be smart with their money.