3 - 6
According to Forbes.com, children as young as 3 years old can understand simple financial concepts. At this age, your child is capable of practicing patience while saving up for something they really want.
Start by helping your child choose a toy to buy with money they save.
Make sure they pick a toy that won’t take too much time to save up for, otherwise they may become frustrated while they wait.
Once they have a toy in mind, explain how long it might take for them to save up for it using simple math. For example, if their toy is $30, you could say, "If you save $10/week, you will get your toy in 3 weeks (or 21 days), but it will take 6 weeks (or 42 days) if you only save $5/week."
After goals and expectations have been set, help them further develop their decision-making skills around how they will spend their money once they receive it.
Something you can do is get three mason jars, label them “SAVING”, “SPENDING” and “SHARING”, and help your child divide their money equally among the jars. The “SPENDING” jar can be drawn from for smaller purchases, like stickers or candies. The “SHARING” jar should only be drawn from when spending money on someone else (or charity), and the “SAVING” jar should only be drawn from for more expensive items.
Also, counting is FUN for kids! Whenever your child has more money to add to their “SAVING” jar, empty the jar and help them count it so they can visually see their progress.
BONUS step: Use positive reinforcement when your child demonstrates patience.
Many situations will present you with different opportunities to congratulate your child for waiting for what they want. For example, while your child waits in line to play on schoolyard equipment, you can say, “You’re doing a good job waiting for what you want — I’m glad you’re learning this so quickly!”.
By doing all of this, they will come to see the importance of being patient while saving, and it will become a life skill that they can feel good about.
7 - 10
At this age, your child can learn about how to make responsible choices with their money. Explain to them that once they’ve spent their money, they won’t have any left so they have to be thoughtful about purchases.
Planning for and buying your groceries is a great exercise to do with your child.
Start by thinking out loud in front of your child when you are making your grocery list.
For example, “We have a lot of toilet paper so we don’t need any more right now, but we are out of oranges so I should put that on the list.” This teaches them to keep supplies replenished without excess. Also, if you need a staple household item (like paper towels), you can tell them about buying in bulk to get a cheaper per-item price.
Once your list is made, take them with you to the grocery store.
As you are browsing your options, be sure to continue thinking out loud in front of them. For example, “I think I’ll buy these oranges instead of those ones because these are 50 cents cheaper!” This teaches your child how to get what they need for less.
While at the store, give them a little money to buy something.
You can hand your child $2 and have them pick out a piece of fruit based on your grocery list. This is a simple way to give them a choice to make with money.
Consider other ways to get what you need.
Be verbal with questions like, “Is this something we really need or can it wait until next week?” or, “Could I borrow this from someone else?” or, “Would it cost less somewhere else?” to teach your child critical thinking skills.
11 - 13
At this age, it’s a good time to shift your child’s goal-based thinking from short-term to long-term. Your child should be able to grasp the idea that the earlier you begin saving, the faster your money can grow from compound interest.
An effective way to teach your child about compound interest is to use and compare real dollar amounts, spans of time and interest rates.
First, sit down together with a pen and paper and draw a graph like this one:
Tell your child, “If you set aside $100 every year starting at age 14 and your interest rate is 5%, you’d have around $23,000 by age 65, but if you start at age 35, you’ll only have approximately $7,000 by age 65.” It’s important to use real numbers because children generally do not fully grasp the idea if you just tell them, “Your money can make you more money if you save it.”
While you are covering the topic of compound interest, help your child do some compound interest calculations so they can see how the numbers grow depending on what the interest rate is. There is also a very inspiring story you can share with them about someone who was able to retire at age 30 by using compound interest to his advantage.
Once they understand, have them pick a more expensive purchase than what they’re used to (like an expensive gadget) and show them approximately how long it will take them to save up for it.
Say for example your child earns $30 a month by doing chores around the house and yard. In this case, you can show them how long it will take them to buy that item if they save $5, $10 or $20 each month. At $20 a month, explain to them that they won’t have enough money for other purchases unless they temporarily give up a regular expense or do something to create more income (like selling toys, games or clothing) in order to reach their goal sooner.
Kids want to spend their money on impulse items on top of regular spending (like buying a snack at recess instead of packing one). This lesson will teach them about trade-offs, saving money, and how to take advantage of compound interest.
14 - 18
At this age, help your teen open a savings account if they do not already have one.
Teach them to deposit any income they receive into their account, and use their debit card to pay for things so they have a clear record of income versus expenses on their bank statements.
Also, ask whether they are planning to go to post-secondary school.
If so, they will need help comparing cost differences and learning more about the financial aid options available to post-secondary students. It’s also a good time to discuss what school could be like for them, depending on their lifestyle.
Start the conversations above by comparing college costs. Colleges typically have something called a “net price calculator” on their website, which tells you the approximate overall cost for a student to go there. This number may discourage your teen, but you can explain the difference in salary between those who graduate from college or university versus those who don’t. This will show your teen that post-secondary school, although a very large initial investment, can have a much greater return.
Talk to your teen about how much you can realistically contribute to their education fund each year.
This is a good time to discuss financial options with them, like applying for scholarships, bursaries and grants, or taking out a student loan and exploring government programs that can help them pay it back. Being open, honest and informative with your teen about these things will help them decide which schools would be appropriate to apply for based on cost.
Help your teen look beyond graduation.
Discuss employment prospects and how potential loan debt will affect their lifestyle once they graduate. As with any investment, it’s good to decide together if investing in a particular school is going to be worth the return or not.
Have them get a part-time job.
When your teen heads off to post-secondary school, they should be working no more than 20 hours a week to prevent their academic performance from slipping. An on-campus job is ideal because students who work on-campus are more engaged in campus life, and they tend to do better academically, too.
18+
At this age, your adult child is likely able to make good financial decisions and it is time to introduce them to credit cards.
Start by teaching them how to establish good credit.
This important step will save them from accumulating credit card debt on top of possible student loan debt, which can make it nearly impossible for them to buy larger items (like a car or a house) due to bad credit later on. Prospective employers may also check their credit history to help decide whether or not to hire them, so having a good credit score is crucial.
Then, teach them to use their bank statement to understand their financial limits.
If your adult child has been using a savings account for all of their transactions, help them generate and print their bank statements so they can use them to learn how to budget, save money, and understand their credit card expense limit.
This 5-step process can help them identify their limits:
1. Using their bank statements, add up their total annual income.
2. Add up their total expenses for categories like rent, groceries, car insurance, utilities, and other basic necessities. Also add up total expenses for entertainment, club memberships, subscriptions and other less necessary items.
3. Divide these annual totals by twelve to calculate average monthly totals. Have them write monthly average amounts into a monthly budget worksheet.
4. Split their average monthly income into three sections so they can see what they have for annual spending, saving, and sharing money (explained in the Ages 3 - 5 section).
5. Compare their total spending money against all of their expenses. Will it cover everything? If not, they need to re-evaluate what they're spending their money on. Perhaps they can find cheaper food at a different grocery store, or the brand name clothing they love at discount stores or outlets. If they can't find ways to spend less, they will have to dip into their "sharing" and "saving" money.
Help them decide which credit card to sign up for, and discuss co-signing.
Together, research which credit cards have the lowest interest rate and no annual fees before signing them up. A parent typically needs to co-sign for their child to get a credit card. Before you co-sign, explain the importance of paying off their credit card because, in this case, it will affect your credit history too.
With all of this information, your adult child should have a clear idea of where their money is coming from, what it is paying for, and what they can expect to have leftover. They will also understand the importance of regularly paying off their credit card.
IMPORTANT: If their spending and sharing money are being used in full to cover all of their expenses, they should consider holding off on getting a credit card so their savings can continue to grow.