While managing finances is an essential part of adult life, it’s not commonly taught in formal education. What is learned is usually done informally, as your children pick up on how you talk about, think about and use your money. 

“We find in the banking industry that a lot of people had to learn about everyday finances as an adult, and that they struggled and made some costly mistakes before understanding it,” said Mary Kondro, Senior Leader of Estate Advice team and mother of two. “Long term saving, budgeting and credit is not something taught much in school. Because of that, it’s up to us as parents to teach our children about money.”

As a parent or guardian, you have the most impact on how your kids view money, providing an opportunity to intentionally shape your child’s financial perspective for the better.

How to teach kids about smart financing

One of the most important money management fundamentals kids can learn at an early age is differentiating between things they need and things they want—then learning how to save for them. 

Children don’t understand that money has to come from somewhere, so they don’t understand the value of a dollar when it comes to making purchases. Here are some methods to kickstart their learning.

Split their earnings into categories

If your child is on the younger side, start teaching budgeting basics by using three jars: one for saving, one for spending and one for donating.

If your child is a little older, you can start adding more financial basics. “I suggest getting your child a bank account sometime between the ages of six and nine. Then when they receive money as a gift, you can teach them how to split the money into three categories.” 

Former branch manager, Kondro continued, “[for older children,] a portion goes into a piggy bank for fun stuff they might want. Another portion goes into a jar for things they might need. The rest goes into the bank account as part of a long-term savings plan. I like the 50/30/20 ratio. It allows them to have money for the fun things right now while also putting money aside for needs and savings.”

The money that’s in the piggy bank can be used to buy a toy, take to the corner store for candy or whatever else your kid is interested in at the time. Having their own money to spend will teach them quickly how much things cost, how to be more selective with their purchases and how to save for the larger items.

Saving money for things they need can teach children that money is essential for everyday purchases. Try sitting down with your kids and help them start to identify needs versus wants. This will help them understand what needs they may have to spend their money on and why they’re putting this money aside.

The money in the bank account is for long-term savings. While a kid isn’t saving for retirement, they can be taught how to identify a long-term savings goal and figuring out how much they need to save to reach that goal in the future. That could be a new bike, family pet, a car when they’re a teenager or even post secondary education. You could put up a picture of the item somewhere at home, reminding them why they’re saving this money.

“In their mind, kids will know that saving for these things will take time and that they’re in the far future. Teaching them to get into that mindset and making long-term savings a natural part of handling money, will give them a better understanding and ability to save for retirement when they get older,” said Kondro.

Let them handle money

Handling money and spending it for themselves allows kids to learn about the value of a dollar at any age. 

When they’re between three and five, you can create activities to help them understand the concept of spending money. For example, you can create a pretend store with items that have price tags. Then, give your children some money to “spend” in the store. Or you could do a baking project, allowing your kids to purchase each ingredient so they understand that even simple things like flour and sugar cost money.

When your kids are older, giving them a small amount of cash to spend or a gift card can help them learn how to do some math in the store to see how much they can or should spend on something. The act of paying for something at the cash register and receiving change can also be a learning experience for kids.

“I noticed with my own kids that if they are in a store using their own money, they don’t just throw everything they want in the basket. They pick and choose, start to put items back and learn very quickly that when the money's gone, it’s gone,” said Kondro.

This helps children learn how to keep track of what they’re spending, a skill that’s hard to have even as an adult in an era of tap and mobile pay. Even small transactions can show kids how to create a plan for their money, providing an opportunity for them to learn a skill that will benefit them into adulthood.

Be a financial example for your kids

Your relationship with money has a profound effect on how your kids perceive finances. Take time to evaluate how you think about and use money. How well do you feel you understand your finances? How is your confidence in setting financial goals and taking steps to get there? 

If you find that you’d like to shift your money mindset, we have resources to get you started. You can take our Money Minded assessment to discover the areas of financial knowledge you can grow in, and receive a customized learning plan to guide you. 

The more you educate yourself, the better you can equip your kids with the knowledge they need to thrive in their financial wellness today and all of their tomorrows.

Looking for more resources? Try our interactive story tonight at bedtime!