Being a parent presents us with daily challenges, including decisions about what things to expose our children to. One of the questions I am constantly asked by parents is what should they teach their children about money, and at what age.
Talking about money is no different to talking about how to keep healthy or how to keep safe when using the internet. If your child thinks money is something that “mum and dad get from a machine”, then they don’t know how hard their parents work to generate an income for the family and meet all of their expenses.
Moving money from an abstract concept to something tangible that is earned and saved before it is spent is an important step for children to understand. Children are more intelligent than we often give them credit for. They are also more understanding and resilient – if there are tough financial situations to explain, what children appreciate most is honesty, consistency and facts.
So, if you don’t have enough money to buy something your child has asked for, be honest and put the facts in front of them. Explain the difference between things the family needs and the things they want.
Tell them that all the “need items” must be purchased first, and then you will see if there is enough money left in the budget to buy what they want. And if there isn’t, tell them how the item can be budgeted for – and how you can all work towards saving for it over time.
What is the right age to start having these discussions?
You should be open with your children about money as soon as they are able to understand. However, what your child needs to know at the age of four or five is very different to what they need to know at the age of 10, 15 or older.
Research by the Westpac Massey Fin-Ed Centre shows that most young people get their financial information from their parents so it is important that parents provide a good foundation for future financial well-being from an early age.
The initial conversation with a four to five-year-old does not have to be about money. Start with the concept of “delayed gratification”. It is a powerful way of teaching children there are benefits in waiting for things. They also need to know that not every demand they make is going to be fulfilled instantly. Every family has a limit to its available resources, even the very rich need to have plans for their money.
For children aged 6-10, involve them in preparing a household budget and allocating money to different parts of your budget. Let them help you prepare a shopping/grocery list and then allocate to them an amount as per your agreed budget.
Take them grocery shopping with you, hand them the list that they have prepared along with a calculator. Give them the responsibility of staying within the allocated budget and be strict with this. The incentive for the child could be that if they manage to get all the items on the list for less than the allocated amount, they get to decide how to spend the surplus.
When you get home, this can become a conversation about money: the benefits of staying within the allocated amount and how to make tough decisions about what items are priority.
For children aged 10 – 15, give them the responsibility of setting the household budget under your supervision. Discuss the different components of budgets: expenses that occur weekly/fortnightly/monthly/annually so they can see how important it is to have a better understanding of how and where the money is being spent.
They may have a goal of buying something new for themselves – so help them to work out whether it is a need or a want and how they plan to pay for it. Discussions about short, medium and long-term goals can be useful.
For those age 15 and over, start having discussions about their goals for their future – beyond high school. Encourage them to start saving for their future, whether that be higher education, travel, or buying a house.
At this stage they also need to start learning about their rights as a consumer, signing agreements, the difference between debit cards and credit cards, and saving for things you want instead of borrowing.
They need to know they will sometimes go without
Children also need to be made aware that they will sometimes have to go without things they want. They need to understand that, as a parent, it is your moral, legal, social and ethical responsibility to look after their needs, but that you are not obliged to pay for all their wants. But explain that you are happy to work with them to help them save for the things they want.
Another common question is, how much should you tell your children. Should you tell them how much you earn, how much debt you have and what, if any, savings you have in the bank?
There are varied opinions on this. Some parents feel that they should be totally transparent with their children, while others feel that they don’t need to know that level of detail. Either way, children should have a general idea about the household’s income and expenditure.
Children need to know from an early age that money is not an endless resource and there are times when you may not have enough money for the things they want to buy. It is a good idea to discuss options in such cases. You will be surprised at some of the creative solutions children come up with.
The main thing is to involve children in money discussions; give them some responsibility and an opportunity to manage money from an early age so they understand its value.