Avoid These Mistakes When Teaching Your Kids About Money

You don't need to be a CPA to teach your kids sound financial skills.

Avoid These Mistakes When Teaching Your Kids About Money

Public schools don't typically teach financial literacy, leaving the task on the shoulders of parents. Yet nearly one in four Americans has more credit card debt than savings, meaning parents aren't exactly doing a good job. The good news is you don't need to be a CPA to teach your kids sound financial skills.

The second bit of good news is you can start teaching kids about money right now. Children as young as 3 can grasp basic lessons in savings and spending. Too many parents — perhaps thinking about their own financial miscues — make teaching kids about finance harder than it has to be. In the worst cases, they avoid the topic altogether.

There's no right or wrong way to teach kids how to use money responsibly. Experts, however, recommend avoiding these mistakes to make sure your kid starts life on the right financial footing.

Waiting Too Long To Talk About Money

Kids as young as three and four years old are starting to understand the concept of money.

Waiting too long to discuss money with your kids has potential consequences, according to a 2014 study by researchers at the University of North Carolina and the University of Texas. "The takeaway here is that even young kids are aware of financial issues, regardless of whether parents talk with them about money," lead study author Dr. Lynsey Romo said. "And if parents aren't talking with their kids about subjects like family finances or debt, the kids are drawing their own conclusions -- which may not be accurate. Even if parents don't want to discuss family finances with their children, it may be worthwhile to explain why they don't want to discuss that topic."

Avoiding Conversations About Money

At least some financial topics were off limits when discussing finances with their kids for 74 percent of the parents responding to a T. Rowe Price survey. That echoed findings of the UNC/UT study, where children reported knowing that certain topics, like parental income, family investments and family debt were "off limits," even though those same kids didn't know why their parents didn't want to discuss certain topics.

Parents, for their part, may be reluctant to discuss certain parts of finances because they are embarrassed of their own, past financial mistakes or feel they are poor role models. But that strategy is fraught with pitfalls: kids may feel like they're on their own to figure out money, and will make mistakes. Acknowledge your own shortcomings and get over your hang-ups. Start with the basics: setting aside money for emergencies, saving for bigger purchases and avoiding credit card debt are all financial basics that are easy to teach and easy for kids to understand.

Lying To Kids About Money

T. Rowe Price also found that 28 percent of parents lie to their kids about money.

Reasons ranged from being embarrassed when a child asked a personal question, such as how much a parent makes, to responses like "We can't afford it" when the parent simply didn’t want to buy something the child asked for. The message of those white lies, however, teaches children that lying about finances is acceptable and can be used to cover up financial problems. If there are certain subjects you don't want to discuss with your kids, a more direct "I don’t want to talk about this issue" with a non-evasive explanation why the topic is off limits is a much better response.

Failing to Make Sure Kids Understand How Much Things Cost

Roy and Susan Kim are a husband-wife team that write Adventures in Finance with Bull & Bear, a recently-launched children's book series designed to teach kids between the ages of 3 and 8 basic financial literacy. Susan Kim suggests having kids make a list of things they need, putting them in order from most- to least-important. Discuss how much each item costs, then segway into a discussion about not spending more money than you have.

Similarly, she recommended playing the "vacation game" to help kids get a sense of how much different things cost. "Explain that a car or a plane needs gas for energy like food," she said. "Ask if they know how much each type of travel costs. How does your family decide which travel to take?"

Not Leading By Example

Talking with your kids about money is important, but your actions may very well speak louder than your words, cautions Wes Shelnutt, Director of Financial Training at Mvelopes, a budgeting education and financial management app. "Kids learn a lot through simply observing -- picking up on their parents’ attitudes and actions," Shelnutt said. "In order to stop your kids from copying your own bad money habits, you need to take a closer look at your own financial management skills to ensure you’re setting the right example."

In other words, practice what you preach: if you want your kids to grow up valuing the importance of an emergency savings fund and no credit card debt, it's time to start paying off your high credit card balances and putting aside money for a rainy day.

Failing To See That Money Stresses Kids, Too

A 2014 H&R Block survey found that teens worry about money. They worry about having the same standard of living as their parents, paying for college, and finding a job.

That anxiety is compounded when kids feel like they don't understand finances. The best cure for that anxiety is information, underscoring the importance of having an ongoing dialogue with children about finances. "Many parents wait to talk to their children about money until they get their first job, before they go off to school or even when they get married, but by then, they’ve probably already developed some bad habits," Shelnutt said. "To prevent this, it’s important for parents to start having an open dialogue about personal finances as early as possible."

Tying Allowances To Behavior

Experts agree that giving kids a weekly allowance is an important step in making them financially savvy.

But some of those same experts now recommend making an allowance a tool for teaching finances instead of making it a reward for good behavior or doing chores. Tying an allowance to behavior they should be doing anyway sends the wrong message about money. Consider a weekly allowance equal to your child's age not tied to chores or good behavior. A five-year-old, for example, would get $5 per week that she can spend on whatever she wishes. Discuss what you child plans to use her money to purchase so you can begin explaining the skills of budgeting and saving. One time-tested trick that works with children as young as five is setting up three jars: one for spending, one for saving and one for giving. Whenever your child gets money, have them divide the money between the three jars. The spending jar is for small purchases, like candy. The savings jar is for more expensive items, such as a toy, that the child wants but will need time to purchase. The giving jar can go to a good cause or a friend the child knows that is in need.

Failing To Teach Your Child To Give

Jason Edwards, a certified financial educator based in Providence, R.I., said giving to charity should be part of the ongoing discussion parents have with their children about money.

He recommends having kids set aside a portion of their allowance for a church, charity, or good cause to help build their "giving muscles." "Kids can see that what they make can make a difference in other people’s lives; that there is more to money than just accumulating it and blowing it on other things," Edwards said. "Just like you have to build up your savings muscles and spending responsibly muscles, we need to create behaviors for donating as well...It creates a greater sense of empathy for others and demonstrates some of the good that money can be used for."

Not Teaching Your Child How To Borrow

Susan Kim, the co-author of Adventures in Finance with Bull & Bear, recommends parents arranage to have their child borrow a toy and give it back. They can then explain how the same can be done with money.

"Borrowing money from friends, parents, the bank or a store is a similar concept," she said. "Just like a toy you need to pay back the money borrowed after a certain amount of time."

Fighting With Your Partner About Money In Front Of Your Kids

Children as young as six can sense when there is a disagreement about money between partners, leaving kids to wonder which parent is right.

Conflicts about money are normal in any relationship, as each partner enters the union with their own financial habits and values. But open conflicts in front of your kids can have consequences. According to a study in the Journal of Family and Economic Issues, college students with parents that often fought about money were also likely to have $500 or more in credit card debt.

Thinking Your Kids Are Too Young To Understand Investing

By the time your kid is nine or 10, she can understand the basic idea behind investing. That is the time to discuss college savings and even retirement savings with your child so they will start to grasp the importance of investing early.

In 2013 the Investment Company Institute warned that people under the age of 35 were too conservative in their investing strategies and could face income shortfalls when they reach retirement age. Teaching your kids about investing at a young age also helps them better understand risk and rewards. Parents were also less likely to discuss investing with girls, with just 50 percent saying their parents talked to them about investing, compared with 58 percent of boys. Whether you have a son or daughter, it's important to start showing them investment calculators so they understand how starting to save at an earlier age will result in a much bigger nest egg later on.

Not Teaching Kids That Online Shopping Uses Real Money

Today's tech-savvy kids don't have as many opportunities to see money change hands. Many have only used online banks and, like their parents, many children prefer the convenience of debit cards over cash.

While 60 percent of children told T. Rowe Price researchers they regularly shop online, 75 percent said they "rarely or never" go to a brick-and-mortar bank. Kids need a clear understanding of how banks work. They need to see how checks are deposited and how money is withdrawn. Taking your child to the bank will help them better understand the connection between the dollars they spend online and their real-world equivalents.

Waiting To Set Up A Savings Account

You can start teaching kids as young as three how to save with a piggy bank at home. But parents should help older kids set up a savings account.

Most banks offer products just for kids as young as six, with joint ownership for mom and dad who can help them manage the account. Look for savings accounts that have no minimum balance or fees, as well as the best possible interest rate (you may find higher rates at a credit union as opposed to a national bank, where rates are often as close to 0% as possible). These simple savings accounts reinforce the idea of depositing and withdrawing real money from a physical, brick-and-mortar business. They also offer parents a chance to teach kids the basic banking tasks.

Missing Small Opportunities To Teach Money Lessons

Too often, parents think talking about money involves big, sit-down conversations to convey a sense of gravitas. Instead, David Bianchi, author of Blue Chip Kids: What Every Child (and Parent) Should Know About Money, Investing, and the Stock Market, suggests building smaller finance lessons into everyday life. "When my credit card bills come in, I show them to my son, Trent, so he can see what my wife and I've spent every month. This makes the connection between watching us hand someone a credit card and the charge showing up on the bill," Bianchi told LearnVest. "We also play a game at restaurants, where we never turn over the bill until all three of us independently guess the total. Trent loves it because he tries to win every time. That's just another thing we do to show him what things really cost."