6 Days to Christmas

6 Ways to Teach Your Child About Money

Piggy bank from German bank HASPA, around 1970.
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You teach your child to look both ways before crossing the street but do you teach them to look at health insurance options before crossing the threshold from living at home to living out on their own?

You teach your child to never talk to strangers but do you teach them to never talk to high pressure sales people that refuse to talk about the details of their financial products?

You teach your child how one bad action can leave to a bad habit but do you teach them how even a small amount of savings can grow to a large sum given enough time because of the power of compound interest?

It is commonly accepted that a good parent should teach their child all about the former part of each of the sentences above but what about the latter? Why does financial literacy seem to fall by the wayside in the minds of many parents? Sure, the US Government has a U.S Financial Literacy and Education Commission but do you really want to leave it up to Uncle Sam to teach your kids about money?

Here are practical ways to teach your child about money that range from very young kids (aka “willing to listen”) to not so young kids (aka “know it all’s”):

#1 Take Your Child to the Bank to Open a Savings Account

Yes, taking your child to the bank to open a savings account is definitely the most well known way to teach a child about money but it’s popularity certainly does not diminish its importance. From a very young age your child can begin to learn about the importance of saving, how interest works, delayed gratification, and more just by the simple act of you taking them to the bank and helping them set up a simple savings account that accrues compound interest.

#2 Allow Your Child to Make Some of Their Own Financial Decisions

There are two different ways that many parents treat their children’s decision making capability when it comes to money and these two ways are just as wrong as they are different. The first wrong approach is to allow a child to spend their money however they see fit with no parental oversight and if the child makes a bad decision then the parent immediately bails the child out and gives them more money so that they can continue to make poor decisions with their money (Sidebar: if the word “bailout” didn’t tip you off then what does this scenario sound most like on a US macroeconomic level but I digress…?).

The second completely wrong approach is when a parent completely controls all spending for their child and never allows the child to make any financial decisions of their own and in turn leave the consequences of their choices.

The best thing you can do is to allow your child to make some of their own financial decisions under close parental supervision, and when a child messes up do not step right in to bail them out by giving them more money but rather use what happened as a teaching opportunity. As the child begins to understand on a very small scale some of the consequences of their financial decisions then they will begin to make wiser decisions and you can feel free to loosen the reigns somewhat.

#3 Apply for a Credit Card with Your Child

What!? Give a child a credit card?! Are you crazy!? Let me explain. This method is not something that you do with a hands off type of approach to parenting.

The reasoning behind this approach is thus—according to a recent Sallie Mae credit card study 84% of undergraduate students have at least one credit card, the average number of credit cards per undergraduate students is 4.6, and out of those 84% of students that had a credit card only 17% paid off their balances in full each month!

If you would rather your kids learn how to use a student credit card from their peers at college then that is your call as a parent but my advice would be to teach your kids from a very young age how to use a credit card properly (i.e. pay the balance off in full each month, never spend more than you have in the bank, use the card for rewards & to increase your credit score, etc.).

#4 Explain Your Health Insurance Policy at the Doctor’s Office

Taking your child to the Doctor or going to the Doctor yourself and bringing your child along with you is a great opportunity to teach your child the basics of health insurance. Explain to them what risk means. Teach them that health insurance is something responsible people buy to protect them in case something really bad happens. Teach in real life examples: “Remember when Timmy broke his leg at soccer practice? That probably would have cost about $20,000 at the hospital if Timmy’s family didn’t have health insurance coverage but since they bought health insurance before this happened then they only had to pay $1,000. Good thing, huh?”

#5 Explain Your Car Insurance Policy if You Get in a Car Wreck

While there are certainly bigger things to be thankful for after a car accident with no injuries if you get into a car wreck (or your child knows someone who has recently got into a car wreck) then use this as a teaching opportunity to of course first hammer home the importance of wearing a seat belt, driving safely, etc. but to also mention the importance of car insurance. Just like buying health insurance before one gets sick is something responsible people so so also is buying car insurance before one gets into an accident. Use a car wreck as a prime opportunity for teaching your child the importance of being responsible both as a driver and as a person who is prepared with proper auto insurance coverage.

#6 Explain the Messages Behind Commercials & Advertisements

Whenever a clever commercial comes on TV or you notice your child looking at a billboard or other advertisement try to spark up a conversation to teach your child about marketing, living frugally, not falling into the trap of having to buy everything new thing that is advertised, etc. This is also a great thing to tie into a lesson about saving and delayed gratification because if there is a new toy or something that a child really wants then teach them the importance of saving up money to afford it (even if you could afford to just buy it out of pocket for them), the lesson of scarce resources (i.e. “if you buy the new Nerf gun then you wont have enough money left over to buy the new baseball glove”), etc.

What About You?

What did I miss? What great ways do YOU have to teach children about money? What things have you found from experience to be successful in teaching kids to make smart financial decisions?


Joel Ohman is a Certified Financial Plannerâ„¢, small business owner, and loves working on various online financial tools. His most recent effort is a website for easily comparing insurance providers.

2 Responses to “6 Ways to Teach Your Child About Money”

  • Jersey Mom April 19, 2010 @11:50AM Reply

    Regarding #2, my children (ages 6 and 7) earn $5 allowance each/week. It is “their money”, they can buy whatever they want with that money. The children understand that if they want something, they need to save up for it and buy only when they have the money for it. In other words, they do not purchase what they cannot afford.

  • Jennifer April 20, 2010 @11:06AM Reply

    In addition to having a savings account, my son makes weekly deposits to his account at his elementary school through http://www.schoolsavings.com. The program is free and run by parents before the school day starts. I really like your ideas about teachable moments at the doctor’s office. Similar to your credit card idea, this program allows my son to practice managing his money.

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