How to talk to your kids about saving money

Parents do all they can to give their kids the best shot at success in every stage of life. Whether that means keeping up with doctor visits, waking up early to commute to a good school or providing nutritious food for every meal of the day, there's seemingly nothing parents won't do to give their children a leg up. But one learning area many parents may be overlooking involves a skill that many adults even find confusing: financial planning.

"Children learn about money through the examples set by their parents."

Even if you aren't scheduling daily economics lessons for your toddler, studies have shown that kids still subconsciously learn about money by observing and listening to their parents - for better or worse. A survey from T. Rowe Price of children ages 8 to 14 and their parents found that kids tend to pick up both good and bad money habits from grown-ups, often without either one realizing it.

For example, the survey found that in families where kids are allowed to save and spend earned money on their own, kids are less likely to blow all their savings at once. They are also more apt to initiate discussions with their parents on how best to use their money.

On the other hand, the survey explained kids tend to inherit their parents' less desirable financial traits, too. Among the 19 percent of survey respondents who said they had declared bankruptcy at some point in their lives, this group also tended to have kids who did not save any money their earned. Bankruptcy and high credit card debt also made parents less likely to talk about personal financial management with their children.

There exists a complex relationship between a child's attitudes about financial topics and how their parents deal with and discuss their own spending and saving. So beyond setting a good example for their kids, how can parents go the extra mile and teach smart money habits throughout their lives? Much of this depends on how old the child in question is.

Early habits and goals

Young children are notoriously curious creatures, so it makes sense to keep this in mind when introducing them to financial concepts. PBS economics correspondent Paul Solman spoke with several experts on the best ways to give your child a financial head start:

  • Allow kids to get familiar with money by simply bringing them along to the grocery store, the bank or other errands. By the time they are three years old, kids can understand the basic concept of exchanging money for goods and services.
  • Kids benefit from having a small source of income, but parents should be wise about how they earn and use it. Chores are a natural way to introduce the concept of exchanging work for pay. After providing compensation, parents should also consider discussing basic budgeting. Allocating each payment into three jars - one each for spending, saving and sharing, for example - is a classic method that demonstrates the importance of financial planning and goal-setting.
  • Remember to explain financial choices to kids in terms of long-term benefits rather than short-term gratification. It can be hard for children to understand why buying the big, expensive toy now means going without any new toys at all for a while. Working to help your kids understand opportunity cost and even basic investing principles often pays dividends in the long run.
BudgetKids who learn basic budgeting early on are more likely to lead financially savvy adult lives.

Advanced topics for young adults

As kids grow up to become independent consumers, they will have learned a great deal about money from their parents, their education and their friends. But there are often still many gaps left by the time kids are off to college, and even beyond. Writing for The New York Times, Tim Herrera somewhat humorously admitted that even at 29 years old, he still felt he had "no idea how money works."

And really, who can blame him? Many Americans can probably relate to Herrera's cluelessness on complicated subjects ranging from the Federal Reserve's monetary policy to what exactly a credit score entails. He spoke with Times financial columnist Ron Lieber to get some insight on what young adults need to know about money, and how to get reliable information.

Decoding credit scores

One of the most practical money topics that people young and old often get hung up on is the credit score, specifically what it is, how it works and why it's important. As Lieber explained, credit scores are a standardized way for banks to get to know you a little better before offering a loan on, say, a car, a house or a credit card. The trouble with credit scores is that there are so many different ways to measure them. The bottom line: Credit newbies should focus on getting their free FICO score, which is used by many different businesses. With your score in mind, there's little reason to worry too much more. Simply continue paying bills on time and using credit cards responsibly, and your score can only improve with time.

Savings and retirement

Yet another common topic of confusion is the question of when to save, how to save, how much to save and so on. Before getting ahead of yourself, Lieber explained, understand that saving works differently for short-term and long-term goals.

In the short term, establishing an emergency fund should be the priority. This should be a stash equal to a few months (or more) of basic living expenses, kept in a regular savings account for easy access in case of sudden unemployment, a big medical expense or even a surprisingly big car repair bill. Contribute a slice of every paycheck to this account until you've established some breathing room.

Long-term goals should come next, and these may look different for everyone. Retirement is a milestone that nearly everyone needs to plan for, so read up on your employer's retirement benefits if they are available. Otherwise, look into popular retirement investment accounts like an IRA, or ask a financial professional for help researching index funds and other options.

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