In an attempt to protect children from the “real world”,

parents often fail to teach important lessons about money and finance. Consider these alarming statistics courtesy of DaveRamsey.com:

Poor Knowledge

54% of parents rated their teenager's knowledge of money management as either "good" or "excellent," but 78% percent of the children of those respondents rated their own knowledge of money management as merely average or even poor.

Capital One and Consumer Action, 2003

Uneducated

Only 26% of 13-21 year olds surveyed said that their parents taught them how to manage money.

JumpStart Coalition for Financial Literacy

Going Bankrupt

The fastest growing group declaring bankruptcy is young adults, ages 20 to 24.

Alejandro Cabezut, 2004

Discussing the topic of responsible money management openly, even at the family dinner table, can help children understand the “whys” and “hows” of budgeting, saving and investing with real-life examples.

Soliciting their input can also help you communicate and clear up any questions or confusions they may have. It’s also one of the best ways to get a child interested in the concept of financial responsibility

- says Peter Blatt of Blatt Financial Group.

Most parents understand the importance of teaching kids about money and finance, but many don’t know how to do so or where to start. To help, here’s our go-to guide for teaching your children the important life concepts of money and financial responsibility…

The Concept of Income (Earned Money)

One of the first lessons children will learn when it comes to money is that money really isn’t free. Teaching children that money is something that is earned through work, creativity and ingenuity is an important part of their financial education.

Set Up an Allowance

Kara Harmon, of Moneta Group, recommends that children can take on simple tasks and chores starting at an early age. Many families create odd jobs so children can earn a small amount of money. Other chores must be completed in order to EARN an allowance. An allowance presents an opportunity to make an important connection–I must work in order to get money to buy the things I want or need. If I do not complete my job list, I do not get paid”, says Kara.

This is the beginning of a lifelong lesson we (as adults) call a "work ethic". When a child earns their money, they will appreciate it more and be smarter when spending it.

- adds Elle Kaplan, CEO of Lexicon Capital, a wealth management firm based in New York.

Cash is King

Harmon also recommends using cash at all times to illustrate the value of money in a tangible, visible manner.

“Basics of money management must be taught with visible, countable cash. Establish an allowance system which encourages saving and thoughtful spending. Suggest saving and spending in different areas including charity, ‘quick cash,’ short-term savings, and long-term savings.”

Teaching kids about money

Pay in a Lump Sum Monthly

Mike Zisa, author of The Early Investor: How Teens & Young Adults Can Become Wealthy also suggests paying your children’s allowance once per month. Explaining that

they have to budget the money for the month will help teach the idea that planning ahead for expenses is an essential part of financial literacy.

Responsible Spending & Budgeting

Perhaps the single most important financial lesson you can teach a child is the concept of budgeting and responsible spending. Here are some great tips for doing so…

Have Them Pay

John Bohnsack, of Briaud Financial Advisors, recommends having your children actually pay the tab (with your money of course).

“Any chance I get I have my daughter pay for groceries, ice cream, or clothing with my card. She gets that there is a cost to all of the items. Plus, the interaction with cashiers only builds her confidence”, says John.

Syble Solomon, of MoneyHabitudes.com, also recommends including your children when it’s time to pay the bills.

When children see that you get a bill and actually have to pay for the things you enjoy, they are able to connect with the concept that nothing is free and that everything has a cost.

Teaching Want vs. Need

Parents need to encourage thoughtful spending. Frequently discuss and define wants versus needs. Implement a waiting period before a purchase can be made. Will that toy be forgotten in a few days.”

- says Kara Harmon, a Certified Financial Planner with Moneta Group.

Teaching want vs. need is an important aspect of instilling the concepts of financial responsibility. This lesson will help children prioritize spending and keep a reign on their budgets when they get older.

Kara also wants parents and caretakers to be aware that it is important to encourage compulsive savers to occasionally enjoy the fruits of their work by spending some of their earnings on things they want or want to do.

“Although we are usually concerned about big spenders, compulsive savers can become challenging spouses and business partners”, Kara states.


budgeting

Syble Solomon also suggests that realistic expectations are set. “Chances are you occasionally buy something you don’t absolutely need. You don’t have to look like a miserly saint for your kids’ sake. Be realistic and responsible with money and preach the same for them.” says Syble.

The Importance of Saving and Investing

We all know, as adults, that there are always unexpected circumstances or events that we simply can’t plan for. In order to be prepared for things like a job loss, loss of income, emergency repairs etc., it’s vital to have money stashed away for a rainy day. Savings and emergency funds are crucial aspects of teaching financial literacy to children.

Planning for Unexpected Events

To communicate the importance of saving money, provide real life examples to your children as they happen to you and your family. If a major home repair is needed, explain the unplanned expense and how you were able to use savings to cover the unexpected cost. Also do your best to illustrate the problems you could face if proper savings weren’t in place.


Barbara O’Neill mentions on FoxBusiness.com that a good rule of thumb is to keep (at minimum) a three-month reserve for savings. “People’s eyes glaze over when I tell them this, but it’s imperative,” advises O’Neill. Learn to cut corners, live on less and shop in cheaper places.”

The Value of Investing

Mike Zisa suggests that you show children how their money will exponentially grow over time through the power of compounding using an online calculator like this one to demonstrate.

Mike also provides an interesting concept for replicating the workings of 401k investment plans. Mike recommends that, if possible, you “match” your child’s investment (therefore incentivizing saving) at a rate of 50% for each dollar your child “invests” or saves.

saving

Communicating the Concepts of Borrowing and Interest

Marty Durbin, a CPA with Aperture Retirement Designs, has the following advice for illustrating the concept of borrowing and interest:

“If a child really wants something, resist the temptation to just give it to them. Use it as a learning opportunity. Ideally they can save up the money to get it. If they haven’t mastered that yet, they can borrow the money from the ‘bank of Mom & Dad.’ In this case, you’ll loan them the money at a certain rate of interest and then make ‘allowance deductions’ from their weekly allowance until their loan is paid off.

Presenting them with a ‘pay stub’ each week reflecting their ‘gross’ and deductions for ‘principal and interest’ will help them understand how things work in the real world. They should see that their lack of savings resulted in them paying more for something that could have been paid for without having to pay extra for interest.”