11 Ways to Teach Your Kids Good Money Habits

It’s no secret that having a solid financial education can set up your child for a successful and secure future. Research has shown that financial literacy for children can reduce college debt and increase college retention, increase net worth by the age of 25, and reduce credit card debt in young adults. Unfortunately, as the Brookings Institute explains in their recent review of financial literacy programs, poor financial literacy skills create a number of consequences for younger Americans: “individuals age 18 to 34 [with low levels of financial literacy] pay more in interest on credit card debt and penalty fees than older adults, and are also twice as likely to take a hardship withdrawal from their retirement account or miss a mortgage payment.”

While schools and businesses in Arkansas and Missouri are stepping up their game to do their part to improve financial literacy scores for children in our region, introduction to these valuable life skills can never start too early, and home is often the best place. The fact that you’re reading this post shows that you value your child’s financial education and have the desire to help prepare them for success later in life. Starting them on the right path at home doesn’t have to be hard, either. Here are 11 simple ways to teach your kids to save, spend wisely, and help them develop good money habits.

Storytelling has long been utilized for its innate benefit of teaching children valuable life lessons. Financial skills and responsibility can also be developed through reading, in much the same way other good habits commonly encouraged found in children’s books are. The Arkansas Financial Education Commission, has a lists a number of financial education books for children of all ages, including the beloved classic by Judith Viorst, Alexander, Who Used to be Rich Last Saturday. For a complete learning package, consider the Sammy Rabbit financial literacy curriculum.

Children get their first sense of how to prioritize their spending by watching their parents each day, from comparison shopping at grocery stores to online impulse purchases that arrive on their doorstep. As author and financial planner Mac Gardner recently explained to CNBC Select, “the number-one behavior children learn from their parents is spending habits…it’s one of the first financial behaviors children pick up at an early age.” Involve your child in your day-to-day money decisions by taking them with you as you shop and explaining your purchase choices—large and small. This will help them understand the logic behind your spending and, more importantly, how your family values their hard-earned money.

We expect children to manage certain responsibilities even from a young age, like helping to keep their rooms tidy and cleaning up their toys when they are done playing. Once children reach preschool age, they can also contribute to simple household chores above and beyond their basic duties in some fitting capacity. Consider paying them when they do.

There are numerous benefits to having a consistent system of paying children for chores. They will learn that money comes from hard work and that their contributions to the house are appreciated, in addition to the basic life skills that develop when they help care for a home. On top of all those valuable lessons, they will also have their own regular source of income, which will give them an opportunity to learn an especially useful life skill: how to manage their money. You will find thousands of recommendations for chore systems online, as well as how much your child should earn each week. It’s okay to try a few out before you find the right fit for your family. If you’d like to get more high-tech, check out these chore tracker apps recommended by Education App Store.

Some families like to use a little bit of cash as a way to recognize and reward their children for their hard work when those quarterly report cards come around. Others hope that a financial incentive for doing well in school can be the needed inspiration to give sagging grades a bump. Regardless of your reasons, paying your children for good grades can have just as many benefits as paying them for chores, from helping them make the connection between hard work and success to giving them a financial opportunity to develop good personal spending habits.

Follow a simple and consistent schedule, for instance, $10 for each A and $5 for each B, but consider adjusting these values based on your child’s age and your household budget. If paying your children for each report feels like too much, scale it back to an end-of-year bonus for final grades, which will allow them to use this cash for summer fun.

The flip side to guiding your children to make good spending decisions is to encourage them to set aside money that is not for spending. If you give them a weekly allowance or pay them for their good grades, consider having them to always save a portion of their received money. You can use the popular jar system, where you use three jars: one for spending, one for saving, and one for giving. As Forbes explains in their article “The Three Jar Method: Raising Financially Responsible Kids And Building Savings Habits Early”, this system not encourages savings, but teaches philanthropy, while letting your children also have a little fun with their earnings.

While the three-jar system is great for preschool aged children through early elementary school, as they get older, you can start doing a more advanced level of budgeting (more on this below) which includes setting larger savings goals, like saving for college or a new car. Check out our post, Creating a Savings Plan, for tips on how to get started.

As your child gets older and their ‘savings’ jar starts to overflow, it’s time to teach them how to use a bank account to allow their money to grow securely. This also serves to provide them with an introduction to the grownup world of financial management. You can open an account online but taking them to a brick and mortar branch will help to remove some of the mystique behind banking and solidify the experience for them. And they might even get treated to a sticker or lollipop! While most bank accounts require you to be 18 to open one, a child can open a savings account with a custodian at any age. Consider our Statement Savings Account, which is free for minors with no minimum balance requirements!

This is a big lesson—one that will likely take years of small reminders to instill. But it’s also one that doesn’t take a lot of concerted effort on your part. You simply need to be consistent. Start by having a basic discussion of wants vs. needs, where you explain the major differences, while acknowledging that it’s a spectrum; sometimes it will be hard to tell the difference. For instance, clothing is a need, but expensive, specialty clothing items might be considered a want. Let them know that you will always provide them with their general ‘needs,’ including healthy food, shelter (including the things that make your home habitable: electricity, water, heat, furniture, etc.), clothing, and transportation. But ‘wants’ are discretionary, and include things that entertain (toys, games, electronic devices) and pricier versions of a ‘need’ where the extra cost is more of a luxury than a necessity. As VeryWell Family writes in their article, “Talking to Kids About Wants vs. Needs,” “designer clothing provides warmth and protection, but no one needs a $200 pair of jeans.”

Money Prodigy has created this collection of resources to get the ball rolling with children of all ages. Once your children have a handle on distinguishing between wants and needs, use everyday opportunities (like all those requests for toys and junk food!) to help them keep the lesson pertinent and hone their ability to understand the difference. Finally, take the time to develop a budget with them, and include them in your family budgeting, to really drive home the message.

Knowing the difference between wants and needs is a central aspect of budgeting that helps lay the groundwork for financial responsibility. The three-jar system mentioned above is, in fact, a preliminary form of budgeting, where money is set aside for the future (savings) and fun (wants), as well philanthropy. (A side note: while your child’s budget won’t include needs yet, you can teach them how to prioritize spending on needs by including your children in your own family budgeting decision.) Once your child gets a little older, they are ready for a little more complexity.

So, how do you teach your kids how to budget? It depends on the age. You might find the jar system works well through early elementary school, though The Balance also suggests that children as young as five or six could benefit from budgeting for a specific savings goal. They recommend starting with a “simple three-column sheet with the words ‘goal, savings, and cost’.” Your child can use this sheet to name their goal (including the date they’d like to achieve it), the cost, and how much they’ll save each week (help them work through this calculation). This basic strategy will remain useful even as they get older and start saving for larger purchases or college.

By age eight children will have the math skills to start grasping how your family budget works, including the costs of household expenses. Include them in your regular budgeting sessions, as well as discussions on major purchases (and how you will pay for them). And when they get their first job, help them make their own advanced budget. Junior Achievement offers this free, printable budgeting worksheet for teens which features different sections to input monthly income, spending, as well as short, mid, and long term savings goals.

As parents and caregivers, we want what is best for our children. But sometimes we need to let go and let our children learn and grow on their own—even if it means making mistakes. Maybe your child sets an unrealistic budgeting goal, like an overpriced video game. You might want to correct them right away to avoid the frustration they’ll face when it takes too long to achieve their goal (or when they’ve blown all their savings on something that might not be that important to them). Resist that urge, and let them learn from the experience, which will help them make smarter choices in the future. As Romper points out, making mistakes not only “increases self-reliability” but it also “creates the ability to accept consequences.” If you allow them to make financial mistakes when they are young and the stakes are low, they’ll have a better chance of avoiding the negative outcomes of poor decisions when they get older.

As your child grows older, they will begin to make more and more of their own purchases, from gas for their car to clothes shopping to takeout meals. As points of sale become increasingly cashless, and more purchases are made online, only having access to cash can be a major hindrance. And apps like Venmo often require a connection to a US bank account, credit, or debit card to get started. At some point as your child reaches their teen years, having a checking account with a debit card makes sense.

Minors can open checking accounts with the help of a parent or guardian—and your name on their account means you can help them keep an eye on their spending and their balances, as they start to learn how to manage their own finances. At CS Bank all our checking accounts have no monthly fee and come with a free debit card, making them great choices for teen debit accounts.

Savings accounts usually offer a small amount of interest and explaining the basics of compounding interest doesn’t have to wait until your children are older. Easy Peasy Finance has a whole series of financial literacy videos for younger children, including this one on compound interest. As your children get older an additional way to introduce them to simple investing is to help them get a checking account that comes with rewards; check out our post “Choosing a Rewards Checking Account” for more details on these accounts and how to pick the right one for you or your child.

But there is much more to investing than these standard banking products, and as your child is older they can begin understanding the concept of long-term saving and investing—the perfect capstone to their financial education. If you already have a 529 Education Savings Plan for your child, show them how much you’ve saved, how much you’ve earned in interest, and encourage them to make contributions, too. And if you don’t have one, consider opening one.

While minors can’t open their own investment accounts, you can open a custodial account for them, with your child as the beneficiary. Once they turn 18 or 21, they will gain access to those funds. Mutual funds, diversified collections of select stocks, are a great way to introduce them to the stock market while minimizing risk. Retirement accounts like IRAs make a thoughtful and useful first job or graduation gift and provide excellent examples of the exponential growth of compound interest over long periods of time. Work with a trusted financial advisor, like a member of our Investment Services team, to help choose the right investments for you and your child, and set up any of the above accounts. You can also check our our Wealth Management Guide for investment beginners. 

Whether you want to teach your young child about savings by opening their first savings account or you are looking for the right teen checking account to help your older kid manage their money, we offer an array of products and services to meet all your family’s financial needs.

We know that it’s important to instill good money habits in your children, and that the earlier you start, the bigger impact it will have. As a family and community-focused bank, we’re happy to be your child’s first connection to the world of finance and continue to grow with them as they branch out on their own. We have many convenient locations across the region in Cassville, Missouri, and Eureka Springs, Berryville, Harrison, Huntsville, and Holiday Island, Arkansas. Stop by with your child or teen today to meet our friendly staff, open an account, and learn more about how we can help set them start their financial journey.