5 tips for teaching kids how to handle money

Children remember simple, repetitive instructions. Brush your teeth twice a day, don’t cross the road at a red light, eat vegetables – there’s a reason to make these phrases, but they only work if you do. Same thing with money. If you want your kids to be good with money, they need to see that you’re making smart choices. The way you manage your money when you are with your children may be more important than what you teach them about money.

In other words: practice what you preach† If you want your children to develop reasonable spending, saving, and budgeting habits, you need to make sure they see and experience how you make wise financial choices for yourself. But beware: this takes time.

However, if you put in the effort and get a clear message consistently, you will inculcate good habits that will make your kids financially smart. Here are five tips to help you do just that:

1. Spend your earnings wisely, that is, what do you do with your grandmother’s birthday gift

Trying to stop your kids from wasting their birthday money can be nerve-wracking. Rest assured, you are not alone. “Are you sure you want to spend money on this?” It’s probably a phrase all parents will say one day.

Remind your children that just because they can buy the game, tennis racket, or Tesla doesn’t necessarily mean they have to buy it.

Show your kids that holding back such small impulses can translate into bigger things later. We put effort into modeling impulse rejection and weighing options. Over time, they will see their money grow rather than disappear – and experience delayed gratification.

2. You need income, aka: why pocket money is important

Pocket money teaches children the value of money. By gaining experience at a very young age with financial successes and failures, children learn how to manage their pocket money well. Giving children a budget to stick to can encourage smart decision-making and teach them how to make their own cost-benefit decisions.

It also means teaching your children to live within their means. If they have spent all of their monthly allowance in the first week, don’t give them more if they want more. This will help them experience delayed gratification.

3. School costs money, aka: to have a long-term plan

Morningstar is all about investing for the long term. It can be hard to sell that to your teen, who probably thinks 10 days is really “long.” But if they realize that planning ahead helps money grow, they will listen. Suggest that they start designing their own wallets when they get older. Hence, it is worth learning about investing and financing – and the benefits of making these strategies work for them.

But also teach them to have realistic expectations and find a strategy that also works during market volatility. And don’t look at your wallet every day, because in the long run it’s better to ignore daily congestion.

“Putting your portfolio back a bit reduces the likelihood of making changes you might regret later, like selling stocks at the bottom of a bear market,” said Kristen Benz, director of personal finance at Morningstar. And remember, the US market’s 152-year return record has been full of bear markets. Either way, the market eventually recovered and reached new heights.

4. Don’t compare yourself to others, but compare yourself to yourself

Kristen Benz also recommends this for children and teens. Not everyone has the same resources at their disposal. And even if peers have a better financial starting point, it doesn’t necessarily mean that they will always be ahead. Admittedly, such disparity is hard for kids to digest, and social media isn’t helping either. Snapchat, Instagram or TikTok are filled with influencers who spread their lavish lifestyles – or give unreliable investment advice.

However, compare yourself with yourself – measure your progress with your financial situation and investment portfolio (or that of your child) and see what improvements you have made. And don’t forget to celebrate the small victories in the process!

5. Think of the less fortunate, in other words: Emphasize the importance of giving

Once the kids are old enough to earn money, be sure to teach them how to give. They can choose a charity or organization that they want to support. In this way they experience how giving affects not only the recipient, but also the giver. Benz encourages older children to pay attention to what she calls “making time on the floor.” Find a balance with the way you spend your time and money so that it brings you happiness and does well, she says.

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