Teach Your Kids About Money in 4 Steps

But maybe not. Kids can begin to conceptualize money around the time they’re in preschool. Though money is a less taboo topic now than it once was, teaching key concepts about it might be harder today, in a world of what Gottlieb calls “invisible money.” Even pulling out a credit or debit card seems quaint when consumers can flash their phones to pay at the checkout or buy something in their social media feed with one click.

While the economy is, by some measures, robust, many young adults say that money problems cause constant stress; consumer debt is increasing faster than household income, and an astounding 36% of millennials—people now 23 to 38 years old—surveyed by Schwab have no savings for emergencies.

If ever there was a time for parents to talk with their kids about money and instill good financial habits, it’s now. “As they say, small kids, small problems; big kids, big problems,” says Gottlieb, who works with multigenerational clients.

There’s no single playbook for what, when, and how to teach kids about money—your circumstances and the child’s personality are part of the equation—but one tactic is universal: “Parents should use milestones in their kids’ lives to sit down and have a conversation,” advises Tim Ranzetta, founder of Next Gen Personal Finance, a nonprofit that provides educators with free resources to teach personal finance. When your tween lands a babysitting gig, talk about saving. If your 16-year-old is on the verge of getting a driver’s license, discuss insurance. As college decisions come into focus, make tuition, student debt, and career plans front and center.

Here’s how parents (and grandparents) can set up kids for good money habits:

Early Childhood:
Teaching by Example

Just as children develop language skills by hearing words, they develop ideas about money by listening to, and watching, their parents. “They are little sponges taking in how you make decisions related to money,” says Scott Rick, an associate professor of marketing at the University of Michigan and father of three young kids.

In a recent study, Rick and fellow researchers found that children as young as 5 had distinct emotional responses to spending and saving money, suggesting that people are prewired to be spendthrifts or savers. This isn’t to say spendthrifts are doomed to making bad decisions or that savers will be misers. “Parents can help kids recognize the emotions around money and help them adjust their behaviors,” Rick says.

The best place to start is by giving youngsters a window on spending and saving. Routine outings to the grocery store, for example, present a great opportunity to talk about the basics: Money is a limited resource; things cost money, and every spending decision comes with a trade-off.

As kids get a little older and have their own cash, parents should let them make decisions about what to do with it, even if it leads to mistakes. “Let them regret a purchase every now and then, and sit with that feeling,” Rick advises. Parents can also introduce the concepts of budgeting and goal-setting. “If your kid tends to be a spender, you can nudge them to save by offering to make a matching contribution,” says Gottlieb, who recently published a children’s book, Zac’s Dollar Dilemma.

Most kids today are digital natives, but cash is king in the early years. “It’s easier to learn about money with physical dollars and coins,” says Robert Westley, a member of the Financial Literacy Commission of the American Institute of CPAs, or AICPA. So skip the latest app and go with the tried-and-true strategy of Mason jars earmarked for spending, saving, and giving.

Tweens and Early Teens:
Practice Makes Perfect

Young children start to understand the difference between needs and wants, but this takes on real weight when they enter middle school and what they want costs more than a candy bar. Cellphones, soccer fees, and expensive sneakers make money lessons very tangible.

Here’s where the training wheels should come off. Regardless of how great your means are, don’t give your kids carte blanche for routine expenses. Instead, devise a budget and come up with an allowance. When Daniel Wiener’s daughter was a teen, he had her manage most of her discretionary expenses, from birthday gifts to movie tickets. “We had a Crisco can in my office we called the ‘personal ATM,’ ” says Wiener, chairman of Adviser Investments, a Newton, Mass., wealth management firm. He deposited his daughter’s allowance monthly. She made withdrawals as needed, though she had to meet annual savings and charitable goals, or get a lower allowance the following year.

The jury is still out on whether kids should have to work for their allowance. Some say that the only real way to appreciate the value of a dollar is to earn it; others argue that it’s more important to teach youngsters to be accountable for their spending. “But the bigger point is that kids need to practice managing their own money and that often means giving them an allowance,” says Ranzetta.

Experts emphatically agree on two points: First, the allowance should be paid monthly or even quarterly, so that the recipient must make it last. Second, parents should outline clear parameters about what’s covered by the money—and not cave in if it’s spent quickly and the child pleads for more.

This stage usually calls for a debit card, prepaid credit card, or electronic-payment option, such as Venmo. Parents shouldn’t blow this opportunity to teach lessons about reading the fine print, spotting hidden fees, and ultimately deciding how to handle transactions. When it comes to overdraft protection, “My advice to parents is, don’t do it,” Ranzetta says. Not only are the fees steep, but also overdraft features shelter youngsters from an experience they might never forget—having their attempted payment declined.

Teens to Pre-College:
Holding Them Accountable

This is when life milestones—and related money matters—come in rapid succession. For many teenagers, it starts with getting a driver’s license, use of a car, or possibly their own vehicle. “This is an ideal time to introduce the concept of insurance,” Ranzetta says. Premiums and deductibles don’t make for titillating conversation, but if getting the car keys is predicated on understanding them, kids will listen.

Parents should help their teens update their budget—or create one if they haven’t done so already—and encourage them to use their new mobility to make extra money. When they start to earn a real paycheck, drive home the value of saving and introduce basic concepts of investing, including the value of diversification and tax-advantaged accounts.

Financial advisor Patti Brennan, CEO of Key Financial in West Chester, Pa., made initial contributions to investment accounts for her four children. She helped them choose a diversified mutual fund, but then let them buy stocks after they explained their decisions. “They saw how difficult it is to own individual stocks,” says Brennan, who recalls that one of her kids chose shares of now-bankrupt Toys “R” Us.

As with savings, parents can offer to sweeten the deal. Wiener matched contributions to his children’s Roth individual retirement accounts when they got their first summer jobs. “They could work for three months and double their money, as long as they saved it,” he says. “Not even Warren Buffett can make that kind of return.”

College and Early Career:
Preparing to Launch

Decisions made during this stretch can have lasting financial implications, whether related to student debt, career prospects, parents’ financial goals, or all of the above. “Parents should start these conversations early before they and their kids make decisions that will follow them around for quite some time,” says AICPA’s Westley.

College money conversations should include costs, budgeting, and desired outcome. Assuming your child has managed money in high school, the financial transition might not be too jarring in the freshman and sophomore years, thanks to student housing and campus meal plans. Upperclassmen often move off-campus—or have internships that require living on their own—and that opens doors for conversations about rent and utilities, budgeting for food, and earning money.

In any case, “once you’re 18 years old, you can start making some serious financial decisions, and bad decisions can start mounting up pretty quickly,” Westley warns. While student loans loom large, credit-card debt can be the bigger concern. In a recent survey of 30,000 college students at 440 institutions, 36% said they already owe more than $1,000 on their credit cards.

Brennan incorporates personal-finance advice in a college internship program at her firm. She uses mornings for education and afternoons for “grunt work,” noting that the latter is important for developing young professionals to be productive members of a team and society.

That’s good advice for parents pondering how to help their kids enter the adult world. In a recent study of 18-to-29-year-olds by Pew Research Center, 45% of respondents said that they had received financial help from their parents in the preceding 12 months.

With housing costs in many cities high, it’s not uncommon for parents to offer support when their kids leave college. Brennan maintains, “we have to help them take ownership of their finances.” In most cases, the best approach is to help a recent graduate go through her budget and offer to fill the gap—for necessities, not luxuries. And parents should specify how much will be provided, how long the help will last, and for what purposes it can be used.

Here’s the thing: Regardless of whether your child is 3 years old and buying something with her own money for the first time, or 23 and paying her own rent, there’s tremendous value in financial independence. “That moment when a young person can feel like they have agency, where they actually can drive these decisions,” says Ranzetta. “It’s extremely energizing and empowering.”

And it’s something that parents should remember when they’re finding it hard to say no.

Email: editors@barrons.com