How to Teach Your Kids About Finance

You can teach money management for children through both your words and your actions—sometimes when you don't even realize you're doing it. Talking finance to a toddler may seem daunting, but a Cambridge University study found that 3-year-olds are already capable of understanding money concepts and that the financial lessons they've learned by age 7 will carry over into the rest of their lives.

The approach for these conversations will vary depending on a child's age. The littlest ones obviously won't be able to grasp the stock market or the nuances of a credit report right away, but you can start simply by explaining the concept of money and having conversations about how to use it. For older kids, think tweens and high-schoolers, more in-depth lessons from a parent about managing money can help them have confidence (rather than fear) as they prepare for their financial future.

Teach Your Kids the Basics of Budgeting

A budget is a financial plan based on your income and expenses. Learning to budget is one of the most basic and essential steps in financial education because it teaches you how to set goals, live within your means and manage your money responsibly.

The simple act of pushing your toddler in a supermarket shopping cart can be a start to their budget education, as they watch you consider one loaf of bread over another based on value and other factors. Backing up those experiences with conversations will help them understand why you checked the price tag and returned one loaf to the shelf.

For preschoolers and kindergartners, tell them you have a certain amount of money to spend on things like food. Load up your cart while making note of what the items cost, and stop shopping once you've used up your budget. Talk through your process in simple terms and convey a can-do attitude. For example, when you find a necessary item on sale, tell them that you now have more for something else on your list (or for an extra treat). These talks should be fun, not frightening.

When your kids reach elementary and middle school ages, you can get more detailed. Once they seem mature enough, you can start to share aspects of your household budget, including housing, car payments, clothes and entertainment. Explain the finite nature of a paycheck and how to prioritize your spending and save what's left over.

You can be more candid with teenagers—to a point. Focus on challenges and solutions, but avoid instilling fear about your family's finances. If bills are making you anxious, tell them why and what positive actions you're taking to alleviate the stress, such as adjusting your budget. Another benefit: If your teenager is familiar with the household budget, they'll better understand why you said "no" to their latest spending request.

Demonstrate Healthy Spending Habits

Kids of all ages will pick up on your attitude and habits with money naturally. Some tough concepts may have to wait or will require more detailed explanation, but you can steadily introduce new topics over time by using real-world examples. You can help teach your children healthy spending habits with purposeful exercises as well:

Arrange a scavenger hunt. While at the store, ask your kids to find a specific item at the lowest price and read the numbers aloud to familiarize them with prices. Try this online too—a search for the best price for an item online can teach comparison shopping.

Set expectations. Before entering a store, clearly state that you will stick to your list. Verbalizing this intention can keep both you and your kids in line—and help you avoid fights as you pass the toy aisle.

Demonstrate being frugal. Let your kids see you make choices as minor as packing a picnic lunch instead of dining at theme park restaurants or as major as opting for a budget ride over the luxury model. Communicate how the difference in cost can be put to good use.

Turn impulse spending into lessons. When your child asks for something unnecessary, don't just shrug it off. Instead, you might ask if they want the item as a future gift or want to set aside some of their allowance for the purchase, or earn extra cash for it. This can help them associate money with earnings and savings—a critical relationship that kids can grasp early on.

Let them practice with plastic. Bank and prepaid debit cards are great tools for kids between ages 10 and 16. They can make withdrawals and purchases without the danger of debt, and learn how to spend within a limit.