Most schools don’t prepare children for financial literacy. That means it’s up to us, as parents, to send our kids out into the world with basics about saving and spending.
Finances are so abstract the human brain can’t understand the finer points until early adulthood. Two famous child development studies demonstrate that fact.
In 1972, Stanford researchers performed a study they called the “marshmallow test.” Children were told they could have one marshmallow immediately or two marshmallows later. Young children almost always chose the single marshmallow because their brains had not yet developed the ability to delay gratification for a larger reward.
Famed child development researcher Jean Piaget performed experiments in which he showed children of different ages two glasses of water. Although they both contained the same volume of liquid, one was tall and thin while the other was short and wide. He called the experiment the “conservation of volume task” and asked subjects if they held the same amount. Most children reach age 7 or 8 before they give the correct answer.
So, what kinds of financial lessons can our children learn at different ages? Fortunately, the research that told us what they couldn’t understand can also guide us to lessons they can comprehend.
TEACHING CHILDREN ABOUT MONEY, STEP BY STEP
Ages 2 to 4: Supporting Skills
At this point, children cannot understand how money works. It’s too abstract. But they can learn how to count.
You can also lay the groundwork for understanding what we do with money. For example, talking through writing a check, using a credit card, and buying groceries with cash prepare a child for deeper understanding once their brains have developed further.
This is also an excellent time to practice counting with coins of different denominations. Do this with care, though. Coins can be a choking hazard for kids left unsupervised.
Ages 4 to 6: How Cash Works
Research at the University of Cambridge indicates that preschool and kindergarten ages are when kids can first understand the concepts of value and prices. At this point, start to involve them fully in grocery shopping and similar errands, taking the time to explain the prices of different goods and even the beginnings of comparison shopping.
It’s also good to start children this young on a small allowance. They should get the same dollar amount each week on the same day. This can work exceptionally well if you set the amount to lower than your child would need to buy something you know they want.
For example, if your child loves $4.99 app games to play on a phone or tablet, an allowance of $2 a month can introduce them early to the value of saving up for something they want.
Ages 6 to 9: Smart Shopping Habits
In this age group, kids are old enough to understand the difference between good and bad deals and between things they want and things they need.
Start talking with them about why you make decisions about regular purchases like grocery and clothing brands, as well as more significant purchases like a new appliance or a vacation.
It’s also the time to have an honest conversation about advertising. That same Cambridge study found a direct correlation between watching TV or streaming video with ads and the number of things kids requested at the grocery store. They’ve been old enough to feel the impact of ads for a while, but now they’re old enough to understand that advertisement is persuasion.
Also focus on delayed gratification during this age range, both by setting an allowance to encourage it and showing how you delay gratification for what you want.
Long-term gratification is inappropriate at this age. When setting a long-term savings goal, it’s best to tie it to short-term accomplishments. For example, don’t set a goal of saving $30 in 10 weeks. Set the goal of saving $3 per week. That longer timeline is too far-reaching for most minds this age.
Ages 9 to 11: Simple Budgeting
This age range is when most children can reliably pass the marshmallow test, meaning their minds are ready for delaying gratification for longer terms. It’s also the time their mastery of math lets them interact with a simple budget.
Previously, your child’s allowance was a token amount — enough to buy candy or a small in-app purchase. At this age, it’s good to increase it to an amount that requires a little management. Experts disagree on whether this “raise” should be tied to chores or school performance, but whatever metric you choose, it’s best to increase both the amount and the responsibilities associated with it.
Once you add the raise, have your child divide their allowance payment into categories. Their brains have begun to develop the ability to perform some abstract reasoning.
Some of the most common and popular strategies on how to divide an allowance include:
- Dividing allowance into thirds, with a focus on charitable giving: ⅓ to spend, ⅓ to save, ⅓ to donate
- Dividing allowance into thirds, with a focus on savings: ⅓ to spend, ⅓ for short-term savings, ⅓ for long-term savings
- Dividing allowance into fourths: ¼ to spend, ¼ for long-term savings, ¼ for short-term savings, ¼ to donate
You might want to attach “bills” to the allowance. The bill might be savings contributions or donations to charity, or could be tied to something more tangible like contributing to a family dinner out. By doing this, you introduce the idea of gross income vs. net income.
Once your child has accumulated $20 to $50 worth of savings, consider opening a savings account with them. By seeing saved money earn interest early, they become more likely to internalize that lesson for their adult money management.
Ages 11 to 13: Advanced Budgeting & Consumer Intelligence
As tweens become more independent, they’re exposed more to advertising and receive more pressure from their peers to purchase specific items or brands. This presents an opportunity to teach about financial opportunity costs.
Choose one or two high-ticket items during school clothes shopping or similar expeditions. Create a reasonable budget to buy an essential item — one that won’t cover a designer or brand-name item. You contribute the budget price, and the difference comes from their funds if they want anything above and beyond what you’ve budgeted. Bonus points for letting them know long enough in advance to build some short-term savings for these items.
The weeks leading up to this choice are an excellent opportunity to teach consumer intelligence. Use Yelp reviews, Consumer Reports, and similar tools to help your child research the more expensive brands’ added value, if any.
Finally, during these years, your child develops the mental capacity and math skills to manage a more complex budget. Involve them in money management discussions for a family vacation, holiday gift shopping, or a similar purchase. This gives them a chance to build those skills in a low-risk situation.
Ages 13 to 15: Increased Autonomy
Kids don’t develop much in new higher-order cognition during these years. The raging hormones of early adolescence reduce some of their executive function.
They also don’t learn much math in these grades that contributes to money management. That means it’s the wrong time to introduce new concepts.
Instead, during these years, you can give them more independent control over things they already understand:
- Instead of a set allowance, let them earn extra money through doing additional chores.
- Change paydays from weekly to bi-weekly or monthly so they’re dealing with more significant amounts and more extended periods.
- Place them in charge of gift purchases and school shopping, with a set budget and parameters.
- Involve them in planning a family vacation or home improvement project, taking the lead on budgeting.
Depending on the child, this can also be an excellent time to sign them up for a checking account with a debit card. If you pay their allowance directly to this account, they can then practice checking their balance before purchasing something. You can also set up a savings account so they can accumulate cash and see their interest grow.
Ages 15 to 17: Credit & Investing
Those last teen years at home might not be the ideal time to introduce investing and responsible credit use, but for many families, they’re the last chance. Once kids leave home, they’re at the tender mercies of predatory lenders, so you want to inform and protect them as much as you can now.
Nobody under 18 can have a credit card of their own, but most issuers will allow you to add a teen to your card as an authorized user. Set up a low-limit card and do this, letting your child know how it works and that it’s only for emergencies.
Each month, go over the statement with your child. Discuss how much of an emergency each purchase was, along with how much extra it costs in interest. You might even allow them to maintain a balance so they see how much that payment takes out of their disposable income in the following month.
This is also an excellent time to introduce automatic investing. Until now, you’ve encouraged your child to save a portion of their allowance and income. Open up their options to include trading in stocks, opening an IRA, and similar long-term wealth strategies. Even small deposits into these accounts at such a young age can pay immense dividends by retirement, so do what you can to build the habit early.
Ages 17 to 19: Dress Rehearsal
Adulthood and independence are around the corner at this point, so you should focus on preparing your child for this transition.
If your child is college-bound, pencil out the likely budget for the schools they want. Tie decisions about student jobs, savings, and similar situations to making college possible. Have a realistic conversation about student loans, especially compared to the earning potential of their desired careers. Make a plan, and work towards its successful completion.
If your child is heading into the military, plan for the next step of their goals. Using military salaries and benefits, design the financial path to their success. The GI Bill for college is a different path than a career NCO using his compensation to set up some rental properties for long-term wealth, and both are different from the military-to-law enforcement path. Have honest conversations about your child’s financial goals and how to accomplish them.
If your child wants to immediately join the workforce, start by involving them in your family budget. Once they understand how it works, begin researching to project the budget they will need to have an apartment with the kind of job they want. Help them train in the job skills and choose the classes to help them get the best possible gig after graduation.
Wherever your child wants to go next, use these last years in the house to prepare them as much as possible for making wise financial decisions when they’re on their own.
FINAL THOUGHT: LEADING BY EXAMPLE
Your children listen to what you say far less than they watch what you do throughout every stage of life. That means your best financial teaching tool for each age is to make intelligent, transparent decisions with your money and to let your children see you doing it.
That might mean cleaning up your financial act a little bit before you “open the books.” That’s OK. There’s no better time to tighten up your money game than when a new child joins your family.
Bethany Fisher is a financial freelance journalist based in Michigan.