Kids and Money: The Right Ages and Stages to Teach Kids About Spending, Saving and Giving

To a 5-year-old, money is clinking coins in a piggybank. To a teenage girl, it’s a new pair of skinny jeans. To a tween boy whose parents have lost their jobs to the recession, money is dinner. The economic downturn has all of us thinking about ways to save and how to spend wisely. 

Teaching these concepts to children in age-appropriate ways will pay off down the road. Knowing that children think differently about money as they grow older is a difference parents can capitalize on when teaching them about finances.

“As they develop, children change in their understanding of what money is, how it is used and where it comes from,” says Katherine Loveland, PhD, a professor in the Department of Psychiatry and Behavioral Sciences at The University of Texas Health Science Center at Houston (UTHealth) Medical School.

Elementary-aged children may be most receptive to learning financial concepts, she adds. Teens may be more resistant–studies show that students who took financial literacy courses didn’t fare any better on exams covering money management than their peers who didn’t take the courses. And while young children don’t fully understand how money works, they absorb lessons from watching their parents buy groceries, shop online or deposit money into their savings accounts.

“However, many children and adolescents will also experience fear that they will become ‘poor,’ that they will be homeless, etc. They may or may not express their fears, so it helps for parents to bring the subject up rather than trying to act as though nothing has changed. Changes in the family circumstances should be addressed at an appropriate level for the child’s understanding. For example, a smaller child might be told, ‘ We can’t buy that right now because we don’t have as much money as we used to.’ An older child or teen will understand if told that a parent was laid off and is looking for another job.

“Children and teens, however, both need reassurance that even if there are major changes, the parent or parents will still take care of them. The adult’s attitude toward the situation (helpless/hopeless versus constructive/ positive) will be important in determining the child’s understanding of what is happening.”

Children under 5 are just starting to learn about money and are eager to learn more. They know that money can buy their favorite toys, but they may not know the difference between a nickel and a dime, or for that matter, a hundred-dollar bill. They are just learning math and counting, so they do not understand how to make change.

Parents who want their kids to embrace saving may find the concept a hard sell. Young children (by nature) don’t understand the concept of delayed gratification. They want what they want (a Barbie Rapunzel Cut-and-Style) and they want it now.

“For most children, it may be a long while until they truly understand where money comes from and why they do not have an unlimited supply of it,” Loveland says. “Children often believe that money comes from the bank, which is true in the same way that one can say babies come from hospitals.”

Try explaining that money does not grow from “planting” the plastic card inside the ATM money machine or pressing the “Order Now!” button on the computer screen. (And we thought our parents had it tough with the old “Money doesn’t grow on trees” line…)

Though children lack money skills, parents still can teach them basic concepts of handling money and making a purchase, such as paying for items they take from the store or having enough money to buy some items, but not others. Parents can start their kids on the road to saving early by buying them a piggybank. To encourage setting aside money for different purposes, some piggybanks have three slots–one for saving, one for spending and one for charity.

Kids learn more about how to handle money and making change as they grow older and acquire math skills. Their understanding of where money comes from also evolves.

“Older children recognize that in general, adults are paid for doing their jobs, and that this is where money comes from,” Loveland says. “However, they still may not have a realistic idea of how much things cost, and which things are or are not affordable for the family.”

One set of parents gave their children the ultimate reality check about the family budget when their daughter was 11 and son, 10. The youngsters had a fair idea how to save money that came in the form of a gift, but not how to save up earned money or spend it wisely. They certainly did not have any idea how the family’s budget worked. To emphasize their point, the two parents came up with a plan for an object lesson they hoped the children would not forget.

The parents cashed their paychecks–in cash–and brought home their money in bills of 50s, 20s and 10s. They scattered the money all over the dining room table. Then, they called in the children.

“They saw this obscene pile of money and they just started rolling in it,” Karen, the mom, recalls. “Then we said, ‘We’re now going to pay the bills.'”

The children organized their money piles and divided the amount equally between them. They started with the biggest bill, the house payment. The kids got nervous “immediately,” Karen says, when they saw their stack of green dwindle before their eyes and how many bills were still left to pay. After three more bills were opened and paid, the children were down to only $16. A pile of unpaid bills remained. Suddenly their son ran to his room and returned with his piggybank, urging them to “take it all.” Her daughter gasped, “Now we’re poor,” and burst into tears. To make up the shortfall, the family took out a gallon jug of small change and rolled the coins into the night.

“By the end of the evening, we were able to show them, you have to budget for spending, saving and donating,” Karen says. “It was a life-changing experience. They learned that if you wrote a check or handed over the plastic card, there had to be real, live green money to back it up.”

The traditional allowance also can help children learn how to budget. As with any aspect of parenting, there are many schools of thought about allowances. Some parents give allowances just as a matter of course, while other parents feel the allowance should be earned through chores around the house. Other parents believe that children should not be paid for doing their part to keep up the household.

“An intermediate course might be to give children a small basic allowance appropriate to the child’s age and needs, together with the opportunity to earn more through doing additional tasks,” Loveland says.

With adolescents, to reinforce saving, parents may also want to open a savings account in the child’s name (if they haven’t already). Even the most savings-averse kid in the most difficult of economic times has to appreciate the miracle of compound interest.

Once children hit their teen years, their understanding of money is much more sophisticated. They can plan for the future and save. The teen years also are when young adults can get jobs and checking accounts–their first steps toward independence and developing the smart money habits they will need as they enter adulthood.

“Our deal has always been that once they turned 16 and could work during the summer, they could support themselves June through August,” says Michael Tramonte, vice president of Finance and Business Services at UTHealth. “If they want to go to the movies or out to dinner–and these days kids will eat out every night of the week–my attitude was, ‘Knock yourself out, as long as you have the money.'”

While they like to spend like most teens, Tramonte says his sons also have learned the value of saving: by his estimates, they have saved 75 percent of their summer earnings. Surviving Hurricane Ike, which severely damaged their Galveston home and devastated their community, also taught them that, “stuff is not that important,” Tramonte says.

Tramonte’s older son has taken the money lessons he learned at home to college, and has learned to live on a budget. Basic grounding in money matters goes a long way to keep college students on track, Loveland says. Without it, teens often struggle in an environment that’s rife with temptation–and credit card offers galore.

While we consider teens to be adults, their brains are still not yet like those of adults. Brain development is not complete in the teen years, so even the most responsible teen may have poor judgment when it comes to money. For example, older teens in college may max out credit cards, feeling they can always pay “later.”

“Older teens and college students who will soon be out of school and on their own should especially be helped to have realistic expectations of their earnings and an ability to keep a budget to prepare them for independent money management,” Loveland says.”Those who leave home for college or for a job without prior experience in managing their money may run into financial problems.”

Our goal is to teach our children lessons that will last them to adulthood, she continues. But the biggest teacher, perhaps, is watching how their parents handle their own money. Children see what we spend money on and how we decide when to save money. For better or worse, it shapes their attitudes about the green stuff.

“As with so many other things in a child’s life, when it comes to money, what we do is much more important than what we say,” Loveland says. “Setting realistic expectations for them by responsibly managing your money is the first step in teaching them to manage their own.”