One of the greatest gifts you can give your children is to help them become financially independent. According to the President’s Advisory Council on Financial Capability (PACFC), which was formed to help improve financial literacy in the United States, most children do not learn basic money management in school.
As a result, young people often acquire more debt, amass less wealth, and forego retirement planning. To help children and young adults become more educated about their finances, the council recommends addressing subjects such as spending, borrowing, saving and investing, earning and income, and protecting their money.
But until basic finance is consistently taught in every school in America, it’s up to parents and guardians to fill the void. Regular discussions about money with your kids can help them to make good financial decisions, and also help them feel more confident and secure about their own futures. The following topics offer a starting point.
It’s important to emphasize the need to save for a rainy day. Open savings accounts for your children and teach them how interest works. Encourage them to set aside a little bit of money from every payment they get. One way to promote savings is to start a matching program, contributing a small amount (such as 20 cents) for every dollar your child saves.
Children generally like to talk about what they want. Setting financial goals, such as purchasing a toy or reaching a dollar amount, can motivate them to save.
Children often think their parents are money machines. To teach them how to earn money, consider giving allowances as a reward for completed chores, great grades or good deeds. As you hand them the money, explain that once it’s gone, you won’t replace it.
For tweens and teens, starting a business, such as petsitting or lawn care, can also offer valuable hands-on lessons about earning.
Make sure that your elementary school-age children learn the value of various coins and bills. They should know how to pay for purchases and make change.
Take your children shopping with you and show them how to compare prices and quality, and how to apply discounts and coupons to save money. Point out to them how taxes are added to the cost of goods, and take the opportunity to explain what taxes are and what they are used for. If you use a credit card, discuss how to use it responsibly.
A budget can help children learn to prioritize needs over wants. Using an electronic spreadsheet or a piece of paper, help your children develop a budget by recording their monthly earnings and spending. Then show them how to project the amount they’ll earn in the next few months and plan for what they will likely spend it on. To provide an example, you could demonstrate how you pay the household bills while continuing to live within your means.
Although your children may be too young to get a loan from an institution, they can still learn how to borrow responsibly from you. When you give your child the money, explain that borrowing usually involves interest, which compensates the lender (you, in this case). You may also explain that borrowing often means repaying the loan on a schedule, and that failure to repay the loan on time is often costly – either in late payments or in damage to reputation.
Ask your children what kinds of businesses sound interesting to them and then conduct research together to see if those businesses would make good investments. Teach your children how to look up stock quotes online or in the newspaper. If possible, buy a few shares of stock and get your children to join you in watching what happens to that investment.
Although retirement will seem like a long way off, encourage older children to start an IRA (individual retirement account). They can contribute some of their summer job earnings, and then watch their investment grow. If they start saving as teenagers, imagine how much money they’ll have once they retire!
Make sure your children know not to give crucial information—such as Social Security numbers, bank account and credit card information numbers, and passwords—to anyone but a trusted source. They should never provide such information in response to a phone call, letter or email they’ve received, no matter how friendly or official the circumstances seem. Similarly, they shouldn’t give out any sensitive information when visiting a website that doesn’t explain how it will protect personal information or doesn’t use encryption. In addition, they shouldn’t throw away old ATM or credit card receipts, bank statements or other documents containing personal information without shredding them first.
If you’re not comfortable starting these discussions – or if you don’t feel knowledgeable enough about the subject matter – take your children to a meeting with a certified financial advisor, who can help discuss these issues in an age-appropriate way. An advisor can also help young people set their financial goals, create budgets, and establish savings and investment accounts.
Seek planners who are accredited by one or more of the standard professional organizations, such as Personal Financial Specialist (PFS), Certified Financial Planner™ (CFP®), Chartered Financial Consultant ® (ChFC®), Chartered Financial Analyst® (CFA®) and Master of Science in Financial Services (MSFS). Make sure that you know which services you’ll be getting and how much it will cost.
A little knowledge and a healthy attitude about money can go a long way in helping your kids establish a bright future. Through regular conversations about personal finance and leading by example, you can give your kids a great start on achieving their hopes and dreams.
The tax information contained herein is not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding tax penalties that may be imposed on the taxpayer. TIAA-CREF or its affiliates do not provide tax advice. Taxpayers should seek advice based on the particular circumstances from an independent tax advisor.
The material is for informational purposes only and should not be regarded as a recommendation or an offer to buy or sell any product or service to which this information may relate. Certain products and services may not be available to all entities or persons.
TIAA-CREF Individual & Institutional Services, LLC, Teachers Personal Investors Services, Inc., and Nuveen Securities, LLC, Members FINRA and SIPC, distribute securities products.
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