Kids and money. Two things that don't go together like ketchup and chocolate. At least, that's the feeling I get from many parents who avoid talking about money at all costs, especially to their kids. But then these same parents want their children to magically grow up and perfectly understand what to do with money once they start earning it. That does not work out well.
Bad ways that kids learn about money
Since money seems to be a taboo subject between parents and their offspring, kids end up learning about money in some round-about and often bad-habit-forming ways. Here are some of those:
1. "We can't afford that.": Whether it's Fruity Pebbles or a new bike, most every kid has heard this phrase. On the surface, you're just telling the truth, but just leaving it at that doesn't give a child the necessary tools to understand the true "why" behind this. They may just assume you don't want to buy it for them, or worse, they feel guilty for even asking and begin to assume there is some major financial tension in the household. If this isn't explained further, the child can assume things that can stress them out and make money something even harder to talk about when they grow.
2. Giving allowance: Again, on the surface, allowance seems like a nice idea. You give your kid a set amount of money each week to spend and enjoy. It's great to give your kids gifts and let them know you like to do so. But the problem with "allowance" is that it isn't a gift, it's a right. It's not given as a gift, but as a requirement, and if the child doesn't receive it, there's a sense of built in entitlement for that money. It teaches that money isn't earned, but is deserved, which is not how things will end up working for them once they get a job, pay taxes, etc. Allowance sets an unfair precedent for the child and passes up on a teachable moment to show that money has value and does not usually come into your hands unless there is work done in exchange.
Read more: Clark's take on kids and allowances
3. Telling kids not to talk about money: As a kid, it's hard enough to get a grasp on how money works when no one shows you the details of a good budget, a bank statement or a grocery store receipt, but being told that you "shouldn't talk about money" further enforces the mystery around how money works. It give the impression that handing money is always a private matter and to never let anyone in on the details, even if you need help. It can lead to bad money habits being hidden even from those who it may effect. You can imagine the financial infidelity, massive debts and other life-crippling events that can stem from this. Not good.
So, how SHOULD we teach kids about money?
Now that we know a few ways to NOT approach money with our kids, what SHOULD we do? I mean, growing up, the best way I knew to learn about money was seeing it managed. Whether it was cashing a paycheck to pay for monthly expenditures, or watching my parents write checks for bills, seeing it happen helped me understand the value of money and how to use it. Heck, even playing monopoly was a great way to understand the transaction between handing over cash and receiving property in return. But there's a problem: no one uses money anymore.
Teach your kids about money by never using cash
Cash is dead. Ok, that may be a bit dramatic. But let's be real. Our kids are going to use FAR LESS cash than we did growing up. And you know what, I prefer it that way. Sure, there's something to be said about showing your kids physical money, giving them the ability to count the 1s, 5s, 10s, 20s and sort them and spend them. But cash is quickly becoming the exception rather than the rule, and we as parents need to keep up with the times if we want to show our kids how money works in today's world.
First, I would make a few things clear before even jumping into the conversation about how to use money. I would establish that money is earned, and that spending money requires a plan before taking any action. Yes, that's right, you need a BUDGET before talking about all the ways to spend and save money. The budget is your financial roadmap, the compass by which you direct all those hard earned dollars. Without one, it doesn't matter what you show your kids about money, they won't understand that you need a money map to guide their finances toward the right destination.
Next, I would talk about how money is no longer represented by funny green paper with a president's head on it. It is now represented by the balance in your bank account, the requirement of your bills, and how you allocate the rest for giving, saving, and spending. For example, a great way to show them how money is digitally represented is to open a bank account and put their hard-eared cash in there. You can then log on and show them their current balance. You can get them a debit card (as soon as they are old enough), and let them know it is their responsibility to track their giving, saving, and spending with that card. Emphasize that the debit card is REAL MONEY, and spending it means it's all gone, just like handing over cash. Once they have a grasp on how to deposit money and spend it, I recommend a few tools to help them track and plan their finances.
Here are a few ways to help kids -- and young adults -- understand money
1. A budget. Obviously, but I do recommend them planning their income and spending weekly, to help them get a feel for what they can and can't afford, as well as what regular earning and spending feel like. Even if they are still just earning by doing chores, this will help them get into a good routine.
2. Checkbook Ledger. Swiping a card can sometimes feel disconnected from reality, but if they have a small ledger with them, they can track their spending and tag it with what category they spent it on. This can be input into their budget at the end of the day to see where their money is going vs. what they planned on doing with it. This helps bring a reality check on how easy it is to waste money on stuff that is not in the budget.
3. Mint.com. Since we're in the 21st century, many kids will have a smartphone with them, and the best way to track their spending and follow a budget is simply setting it up on Mint.com. Mint has a great budget tool, and will automatically categorize spending and even send email alerts when over budget. It's the quick and easy way to get your kids to budget and track their money and understand how to manage it.
The most important thing is to TALK to them about money
These are just a few of the tools you can use to help kids track money in a digital age. But truly, it doesn't matter what form money takes if you don't have open communication with your kids about how money works. Don't let the shame of having done terrible with your money prevent you from talking to your kids about the day-to-day management of your finances. And don't let the societal taboo of personal finance keep you from teaching your kids the details of how you spend money, and how they should plan their finances as well. No one is born understanding how money works. We need to be taught. So let's ensure our kids are.
Jacob Wade is the author of www.iHeartBudgets.net, a personal finance blog dedicated to putting the "Fun" back in Fundamentals of Finance. He is a husband, father, and avid budget nerd who actually spent his recent birthday budgeting for FY14 at his home. If you ask anyone who has known him for more than 13 seconds, you would know he truly does Heart budgets.