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How to teach your kids good money habits that will last a lifetime

Want to teach your kids the value of a dollar? Follow these four steps.
Financial literacy is the ability to understand and effectively use various financial skills, including personal financial management, budgeting and investing.
Financial literacy is the ability to understand and effectively use various financial skills, including personal financial management, budgeting and investing.TODAY Illustration / Getty Images

It’s no secret that money — how much we make and how we spend it — has a huge impact on the choices we make as adults. Young children often aren't aware of their family’s finances, but it turns out that children can and should learn about saving and planning for their financial futures, even at a young age. And, since most kids don’t learn about personal finance in school, it’s up to parents to inform their child’s financial literacy.

What is financial literacy? Financial literacy is the ability to understand and effectively use various financial skills, including personal financial management, budgeting and investing. These may seem like pretty hefty lessons for children to learn about at a young age, but it doesn’t have to be complicated, especially if they start learning smart money habits early.

When should I teach my kids about money?

Kimberly Palmer, personal finance expert at NerdWallet and author of "Smart Mom, Rich Mom," said it can start as early as the toddler phase. “Starting around age two or three, they start asking you for treats, like toys or ice cream,” she said. “That’s the perfect opportunity to explain that we can’t always have what we want, and when we really want something, sometimes we have to wait to get it.”

Once children get comfortable with the concept of patience, Palmer recommends starting to give an allowance or money on birthdays or holidays at around ages five and six.

How can I make good money habits relatable for my kids?

Teaching children about smart money habits doesn’t have to sound like a foreign language, it can be applied to several things in their day-to-day lives. Jim DeGaetano, author of “Larry The Bunny Saves His Money,” says it’s as easy as delaying it, playing it, saying it and displaying it.

  1. Delay it. Avoid offering your child instant gratification — a child can adapt to being patient and waiting for a reward. “My son wants to play, literally, nonstop and he wants to play right now. And so I'll say, 'five minutes — give me five minutes, and then I'll play with you,'” DeGaetano said. Similar to putting money in a savings account and keeping it aside for a special thing they want to buy, it will take some time. Patience is key.
  2. Play it. Incorporate currency while playing games or make-believe with your child. If they are play-cooking, offer to “buy” what they’re making and pass on what you “can’t afford.” If they are dressing up toys or dolls, discuss where the doll gets their clothes and how they cost money to buy.
  3. Say it. It helps to be transparent with your own spending so your child can see how it all works. “When we're buying pizza, it's OK to tell the kids what the pizza costs,” DeGaetano explained. “That doesn't mean you need to sit down with a net worth statement and go through all that stuff you buy with your kids, but it's very important.” If your kids are a little bit older, take them to the bank to open an account. “My kids and I went to the bank and it was nice, they were excited about it. And they were learning about how when they get to be a certain age, they're going to get paid.”
  4. Display it. It's not just about teaching good money habits, it’s being a good role model, too. “If you, as a parent, want to really teach your kids about money, one of the first things you can do is be a good steward of your own dollar and walk the walk,” DeGaetano advised. “Kids are going to look up to you.”

Let kids experience those good habits

After laying all the groundwork for these productive money habits, it’s important that kids get a chance to put them to good use.

While they’re still young, you can show children how earning and allocating real money works on a smaller scale before they reach adulthood. For example, you might introduce investing by creating an incentive. For example, if they earn a certain amount of money for chores and put it in a savings jar rather than spending it, you could offer to match it, DeGaetano suggests.

As they get older, you can build a budget for your grocery list and have your child help you stick to it.

No matter the age, children will want to buy fun, new things. Whether it be a toy or a car after getting their driver’s license, it’s a great practice to say “Sure, you can have that — if you save your own money and can afford it,” Palmer explained. By the time they leave home and have to manage their own budget and credit card at college, they’ve had years of practice and are in a better position to avoid credit card debt and other money troubles.