What & When to Teach Your Kids About Financial Responsibility — Top 10 Financial Tips for Kids

As parents, it’s our job to keep our children alive and safe, as well as educate them about all aspects of life in general. We quickly help our kids learn how to walk, talk, read, write and how to swim or throw a baseball… but teaching them about financial responsibility isn’t usually at the top of the list of priorities.

However, once our kids get old enough to understand the basics of saving vs. spending, it’s time to dive deeper into helping them understand how important their financial choices will impact their lives when they’re older.

It doesn’t have to be complicated. Here are ten simple ways to help guide your child to financial freedom while they’re young:

1. Learn the literal value of a dollar at an early age.

We recommend that parents give their kids a dollar and let them go into a local convenience store and see what they can buy. Let them understand the value of a dollar, and what items that they truly desire cost relative to junk.

For example, say to your child “Every time we go to CVS, you get a dollar. That dollar can be spent at CVS that day, or you can save it for the next time we go, and then you have two dollars.” This will get them in the habit of saving for bigger items that they may want to buy, like a larger toy. This can become a great lesson in saving.

2. Speak openly with your kids about money.

I grew up in a home where money wasn't a topic that was spoken about openly. With my children, I try to teach them that money allows us to live today, but that one day, Mom and Dad will be retired and will have to live off of what they saved. Help them understand that every dollar that comes in can't go out. Explaining to them that Grandma and Grandpa are retired because they saved is a real-life example they can understand.

3. Teach your kids to save their money from their first jobs.

Your kids can begin by babysitting, working in a coffee shop, as a waiter/waitress, or umpire. If possible, tell your kids that you will match them on money they can save. Make the criteria that once the job is done, like the summer, whatever money is saved, you will match. This will get them into the habit of achieving a target and incentivize them to want to save more.

4. Choose a college wisely.

When it comes to making a decision heading into college, this is one of the most critical decisions an individual will make, potentially at a stage when they are not prepared to make it. Explain to them the ramifications of going to a private school versus a state school.

Let’s use the example that you as the parent are anticipating contributing $20,000 per year; and that the private school costs $50,000 and the state school costs $25,000.

If they choose to go to the private school, they leave college with $120,000 of debt (30k x 4years)

The payment on $120,000 over 10 years at 6% is = $1332.25 p/mo.

If your child goes to the state school, they leave college with $20,000 of debt (5k x 4years). The payment on $20,000 over 10 years at 6% is = $222.04 p/mo.

If they are earning a starting salary of $45,000, almost half of their take home pay will be going to debt support. This is a harsh reality which has become a huge epidemic in our country. Banks will lend kids hundreds of thousands of dollars for college, but it is extremely difficult to get a loan to start a business.

Children should understand the burden that debt can have on their future if they choose to take it on.

5. Be sensible about the purchase of your first home.

Teach your children about the 28/36 rule. Simply put: households should not spend more than 28% of their monthly post-tax income on housing expenses. Additionally, households should not spend more than 36% of their post-tax income on debt support* (housing/credit cards / student loans etc.).

Help them understand how much of their income should be going towards housing and debt support, so they don't feel choked by the pressures of their debt. Help them understand that although they may want to expand their family, it means more expenses, and not to put themselves in a position where they can get harmed if a potential job loss or a disability situation were to occur.

6. Understand the importance of credit.

Help your kids understand the importance of credit; that it is a tool to build long-term wealth, but it’s also a major responsibility that if handled inappropriately has major consequences. Explain to them what interest is and how it works.

The $10,000 trip to Vegas sounds like fun, but if you put it on a credit card that has a 20% interest rate, that’s an additional $2,000 per year, or $166 per month towards paying interest only.

7. Educate your children to on the importance of Life Insurance.

Whether you are buying it for them or pushing them to buy it, they should be considering what their options are for life insurance and disability income insurance coverage as early as possible in their life. This could mean when they get their first job or perhaps as soon as they have any true financial responsibility. By purchasing insurance early in life, they are setting a solid financial foundation for their future and locking in their insurability at the youngest and likely their healthiest state.

8. Stress to your kids the importance of having an emergency reserve.

Life happens. It always does. Don't get into the credit card debt trap when you get into a jam. It's very easy for kids today to not build up cash reserves and, in the event of an emergency, have to utilize a credit card. If you have ever had personal struggles with credit cards and debt management don’t be afraid to discuss those with your children. Those life lessons can have a significant impact on the decisions they make. They will respect the real-life example and may want to act differently in their own experiences down the road.

9. Tell your kids to track stocks of companies they like.

Challenge them to plot out the stock price of four or five companies that they utilize on a day-to-day business. This can teach your kids about the stock market at the earliest possible stage in life, and they can get engaged in how stocks move and how one company differs from another. This is a great thing to educate your kids on at an early stage This can help establish their interest in in long-term money management when they may not have gotten exposure otherwise. It can also give you a great thing to talk about every few months with your child.

10. Stress the importance of saving for retirement.

Pension plans are a way of the past – corporations today rarely offer them. Social Security is projected to run out of cash reserves between 2033-2035. If kids don’t start saving early in life, there may not be a retirement plan for them. Get them in the habit of “paying themselves first.” Save your first 10% of income and live off the rest… do this your whole career and you will have a more comfortable retirement.