As far as common childhood experiences go in America, attending school and playing sports or video games are decidedly universal. The same can be said about developing a hobby or making a new friend. But how common is it to have routine memories of learning about money as a child?
Some kids may receive an allowance as a way for their parents to teach them about money. According to a survey by RoosterMoney, 69 percent of American parents said they give their children an allowance. The kids, ages 4 to 14, earn an average of around $9 per week for doing chores like cleaning their rooms and feeding pets, with the bulk of their spending going to candy, books and gifts.
In another study, of adults who gave their kids an allowance, 81 percent said they thought it provided their children with a grasp on financial responsibility.
Still, simply receiving an allowance isn't enough to teach children about the nuances of money — especially as they get older.
“Not teaching your children about finances is a curse," said Paul DeLauro, a wealth planning manager at City National Bank. “It sentences your children to a lifetime of bad decision-making that is oftentimes impossible to overcome. Financial errors early in life often have a cascade effect, leading to traumatic future problems."
Since financial literacy classes are not routinely taught in many schools, and it's unlikely that kids will take up a hobby calculating compound interest or befriend Warren Buffett, the best bet for a sound financial education starts early and at home.
Even though the details of your financial lessons will be specific to your experience, there are some general guidelines experts tell parents to keep in mind.
Read on as DeLauro provides detailed examples of how to teach children money lessons at every age, including creating an active allowance so that your kids can have lasting memories of learning about money.
It may seem as though children this young cannot grasp money choices, that's not the case.
Children in this age group can learn as long as you make it simple. “At this age, it's all about 'either-or' choices," DeLauro noted. “You can either have this, or this, but we can't afford both."
DeLauro suggested making that phrase - “We can't afford both" - a mantra, whether you're choosing a toy to bring home or picking up an ice cream cone for dessert.
He said that it's also important to tie a transaction to an activity, further driving home the idea that things don't magically appear without mom and dad earning money and spending it. “Say, 'If you do X you will earn reward Y, but the cost of Y means your choices are limited,'" he continued. “In this age bracket, focus on 'cost-acquisition rewards' as a binary choice that's limited by affordability."
This is the age to start giving kids a reasonable allowance, which can teach them about delayed gratification and the earning potential of work.
“The allowance must be tied to specific and non-negotiable duties in the home, like cleaning a bedroom or doing the dishes. Never just give money," DeLauro said. “Not enforcing this contract is the No. 1 error most parents make. It teaches the child that rules don't apply, and that reward is not tied to action."
Once an allowance is determined, DeLauro said that parents should let their children identify one or two things that they want to buy.
Make sure the children choose some bigger ticket items that require them to save up for them, so that they can learn the value of money and the effort it takes to earn it. Find out how much each item costs, and then discuss how the child will earn it over time.
“Encourage real-world play versus sequestered play," DeLauro advised. “For example, say a child in this age bracket wanted a new video game system. You could do 'either-or' scenarios, such as: 'Your allowance is $10 a week. You could save your money and have $520 saved by the end of the year, but you'd never be able to spend any of your allowance on anything else that year. Or, for every $10 you save, I will add in an additional $10 to buy you a new bike."
DeLauro refers to this age range as the time to teach children the deeper aspects of the work ethic and how rewards are tied to responsibilities.
He suggested increasing their allowance alongside adding in more responsibilities.
“This is a laddering-up method of moving your child synthetically through what they will experience in the real world," he noted. "When they are just starting out in a career, they'll be at the bottom with limited rewards and marginal duties. As the importance of their duties increase, so will the rewards."
Aside from chores, a teen can also be encouraged to take on a part-time job.
Toward the middle to the end of this age range, it's also important to start discussing the financial responsibilities of college.
Begin an ongoing conversation about where your child would like to attend, and how much tuition costs. You should be clear about how much you can afford, and which schools are generous with financial aid.
Encourage your child to research grants and scholarships, as well as to compare colleges. Most importantly, you should teach your child about student loans, and how interest rates work.
Use a student loan calculator to estimate monthly payments, and research the starting salaries of potential post-college jobs. Then see how the numbers add up in terms of paying back that debt and chat about the best plan of action.
At this stage, young adults are ready to take on personal decisions about their money and the financial options that are available to them.
“If a child can vote at this age, then they should be able to balance a checking account, pay any and all debts on time, and prepare for looming expenses," DeLauro said.
Continue to teach children about cash flow, whether that means going over their paychecks from a part-time job or discussing how to manage their allowance.
Another crucial conversation is about credit cards and how debt accumulates. DeLauro suggested using your household budget as a real-life example.
“Make your child sit with you every time you pay for something that affects them," he advised. “Have them watch you pay the car insurance, the mortgage, the utility bills. As they see what you do and how you do it, engage with your children about each task."
The bottom line is that teaching your children about money is a continual process and one that should be a regular part of life.
“Reinforce that they will be on their own one day and will have to know how to care for themselves, which includes handling their own financial resources," DeLauro said. “The only legacy that truly matters is to leave behind rational, self-reliant adults. And the only way to do that is through a lifetime of focus, education and training. Make that your legacy, not the accumulation of wealth to transfer at death."
This article is for general information and education only. It is provided as a courtesy to the clients and friends of City National Bank (City National). City National does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors or persons quoted as of the date of the article with no obligation to update or notify of inaccuracy or change. This article may not be reproduced, distributed or further published by any person without the written consent of City National. Please cite source when quoting.