According to a MarketWatch report, children between the ages of 4 and 14 received an average annual allowance of $471 in 2018. That’s about $9 per week, which isn’t a bad take for kids too young to join the workforce.
The report, on a study by chore-tracking app RoosterMoney, had even better news: Nearly half (42%) of children who receive an allowance save some of it. Although kids clearly don’t have the same financial obligations as their parents, that nevertheless bodes well for the next generation’s financial fitness.
If your kid isn’t among the many already socking cash away for a rainy day, you can take some commonsense, age-appropriate steps to raise their saving game.
Here’s what parents can do, and when, to prepare their kids to spend and save money wisely as they grow – and to ensure that they continue to practice good fiscal hygiene when they finally leave the nest.
Elementary School and Earlier
1. Talk Openly About Money With and Around Your Kids
Time and again, I hear the same refrain: “It’s never too early to start discussing money with your kids.”
Take this logic one step further and resolve to speak openly about money with and around your kids. In other words, feel free to discuss sensitive financial matters, such as salary negotiations and the status of your retirement accounts, in the presence of your kids. Talking about money around young children might feel awkward at first, but there’s no good reason to shoo them out of the room so that “the grown-ups” can have a frank discussion.
Young kids might not understand everything you discuss, but that’s okay. They don’t understand all the words in the stories you read with them either. That doesn’t stop you because you trust that they’ll pick more up with repetition and age.
2. Lead by Example
Practice what you preach, if you prefer.
You’re your kids’ most visible and important role model. (This may change during their rebellious adolescent years, but they’re all yours during elementary school.) By visibly following through on the fiscal wisdom you dole out to your kids, you show them that it’s possible to live within your means.
Kids are perceptive, and they’ll often pick up on cues even when you don’t explicitly call them out. But your message will ring clearer – and stick longer – with some good-natured repetition.
So, when you want to convey a money management concept to your child, explain why and how you’re doing it. And look for teachable moments wherever you go. Mundane activities, like shopping outings, are ripe for reinforcement. It takes just a few seconds to explain to your kid why you chose the cheaper generic option over the functionally equivalent name-brand option – why pay a premium for a fancy label?
3. Give Them Fake Money
It’s not as cruel as it sounds. Fake money is a great way to teach young kids about the value of money without actually entrusting them with any hard-earned cash. Think of it as training wheels for budding consumers, with you (the parent) playing the dual role of banker and merchant. Set reasonable values for various chores (cleaning up after a meal), privileges (stretching bedtime), and items (snacks)
And, yes, you can use Monopoly money if that’s what you happen to have on hand.
4. Avoid an “Open Wallet” Policy
Don’t give your kids an open line of credit. Instead, set constraints on spending, even if you can afford to spoil them every once in a while.
You’ve surely gotten used to telling your kids “no” on other matters. Putting your foot down on requests for cash or parent-aided purchases is no different. It’s important to lay out this marker early in your kids’ financial education. The longer you wait, the harder old habits will die.
How hands on you’d like to be is up to you. You can go so far as to set up a household “bank” – not a real custodial account in an FDIC-insured bank, but a pile of money whose balance is known to you and your children. This way, your kids will know exactly how much they can spend each week or month – and they won’t be surprised when they hear “no.” Over time, they’ll realize that they have to save up for bigger purchases.
5. Be Equitable
If you dole out an allowance to young children without requiring work, make sure it’s equitable on an age-weighted basis (you can give “raises” every year or quarter). If you pay wages for chores, assign equal amounts of work and an equal pay rate.
The younger your kids are, the easier it is to treat them equitably. Or so you’d think. According to data from BusyKid, a personal finance app for kids, girls receive less than half the weekly allowance given to boys – a starker divide than the gender pay gap for adults. That’s not fair, and not consistent with the principle that every kid deserves the same chance to succeed.
Eventually, extenuating circumstances might render equitable financial treatment impractical – for instance, you’ll probably need to provide more support to the kid who gets into Princeton than the kid who enrolls in a technical certificate program at the local community college. But that’s likely years off – we’re talking about kids in elementary school here. There’s no reason not to start your little ones out on a level playing field.
6. Use Praise and Tough Love
Use a combination of praise and tough love to instill fiscal discipline in your brood. When your kid makes a deposit into your home’s “bank” or tucks a dollar bill away for a future purchase, tell them they’re doing the right thing. If you’re feeling exceptionally generous, throw in a low-cost treat, like an extra half hour of screen time that evening.
By the same token, you can encourage your kids to make sound financial decisions by holding your financial fire when temptation strikes. Remind them that, by spending today, they’re deferring or forgoing future purchases that they may value more. Don’t punish them for overspending; just make it crystal clear what they’re missing.
7. Use Age-Appropriate Spending and Saving Apps
You use apps for everything else these days. Why not at-home financial education?
There are too many legitimate financial apps for kids to name. These apps were specifically called out by my sources, but I’d encourage you to look for additional resources from legitimate sources like the Consumer Financial Protection Bureau.
- Greenlight. Greenlight bills itself as “the world’s first smart debit card for kids that enables parents to pick the exact stores where their children can spend,” says co-founder Tim Sheehan. In other words, it’s a reloadable prepaid debit card for kids that parents supervise and control. Features include instant loading, real-time notifications every time the kid uses the card, the ability to instantly turn the card on and off, and a change collection setting that lets parents keep their kids’ change. In short, says Sheehan, Greenlight lets “parents give all the advantages of digital payments to their kids, while keeping them safe and showing them how to save and spend their money in smart ways.”
- Raise. Raise is a popular platform for buying and selling gift cards online. “Once you purchase a card, sold at a discount by a seller who no longer needs it, you can instantly redeem it online or in stores by showing the barcode on your phone,” explains George Bousis, founder and CEO of Raise. “There’s no need to worry about forgetting your cards at home in a drawer.” While Raise is not designed specifically for financial education, it’s useful for illustrating supply and demand in a way that even young kids can understand (and profit from). Sought-after gift cards typically sell at a smaller discount to face value – a great reminder that, when everyone else wants what you want, you may have to pay a premium for it.
- BusyKid. BusyKid is another reloadable prepaid debit card that lets parents control how much kids spend and save. It also allows kids to buy publicly traded stocks with their allowance, providing a peek around the corner at more advanced personal finance concepts.
8. Pay Kids Fairly for Age-Appropriate Chores
I mentioned above that pay equity appears to start as soon as kids start earning money for household chores – well before they enter the formal labor market.
Assuming you’re okay with paying your kids equitably for equal work, you need to give them jobs to do. A properly instituted household chore schedule is the definition of a win-win. For parents, it’s a dumping ground for mundane, low-value tasks for which they lack the time or patience. For kids, it’s a buffet of practical learning opportunities – a long, low-stakes introduction to the sorts of rote tasks they’ll soon enough need to complete on their own.
What you don’t want your chore schedule to become is a “make work” project. Even in elementary school, your kids’ chores should be tasks that actually need to be done: washing dishes, dusting around the house, taking out the trash and recycling, cleaning and vacuuming floors, detailing furniture, and so on.
Chores are controversial though. Many parents question whether they should compensate kids for household chores at all; parents don’t get paid for doing the dishes or taking out the trash, after all.
A happy medium may be in order. Identify chores that, due to their physical or temporal demands, might be “worth” more than basic, everyday tasks. Think mowing the lawn, cleaning the bathrooms, or weeding the garden. Pay kids enough to encourage them to look forward to – or, at the very least, not actively avoid – these tasks.
9. Pay Them Interest
If you’re not ready to open a custodial or joint bank account for your child, find a way to pay them market-rate interest on the money they save.
This is a great way to convey to your kids that a penny saved truly is a penny earned – or, perhaps, two pennies earned – and that frugality pays off in the long run.
It’s also a great way to introduce very young kids to more complicated investing concepts, such as compound interest, and get them ready for middle- and high school math class in the process. Your kids won’t understand every step right away – I still don’t really understand compound interest, to be honest – but every bit of repetition helps.
10. Open a Custodial Bank Account for Them Early
Once you trust your kids enough to make their own spending and saving decisions without the aid of a piggy bank or closely supervised app like Greenlight, open a custodial bank account in their name.
There’s no real downside to getting this done early, given that your joint bank account opens a whole new world of teachable concepts, but younger kids won’t participate as actively in account management and may not take interest at all. You’ll definitely want to cross this item off your list by the time your kids hit tweendom – say, 10 or 11 years old – to give them plenty of time before high school (and, hopefully, their first job outside the home) to get up to speed on banking.
11. Get Them Excited About Money Management
This is an admittedly subjective directive, but the point is to get your kids jazzed about something – anything – that involves sound financial decision-making.
For instance: Although checkbooks are obsolete today, some personal finance experts recommend ordering checks on joint accounts anyway. Balancing a checkbook is a great way to demonstrate basic money management concepts.
If your family regularly donates to nonprofit organizations, get your kids involved in the process of selecting recipients and setting aside funds for quarterly or year-end giving. More likely than not, they’ll embrace the purpose-driven nature of the exercise; nothing conveys the power of a dollar like seeing firsthand its potential to do good in the world.
12. Teach Them About the Importance of Avoiding High-Interest Debt
Many parents discourage kids from using credit cards altogether. That’s a perfectly valid approach to financial education – one that keeps them away from one of the most common drivers of consumer debt altogether.
Even if you’re fine with your kids using credit cards when they’re old enough, be sure to have the “debt talk” with them before cosigning a credit card application, warning in particular about the risks of carrying high-interest balances from month to month.
The “debt talk” isn’t just appropriate for budding credit card users. You can also use it to warn kids off from uglier forms of debt too, such as payday loans. This shouldn’t be a difficult sell, given the litany of consequences of bad credit: higher interest rates, higher car insurance rates, trouble renting an apartment or securing a cell phone contract, difficulty securing a job or obtaining a security clearance.
Anyway, sound credit management practices are sound money management practices. Every dollar they your kids don’t have to pay toward a carried credit balance is a dollar they can sock away – a dollar that’ll earn interest in an FDIC-insured savings account or grow in an investment account.
High School & Beyond
13. Teach Them About Taxes and Accounting
Millions of kids work part-time in high school. Before they take their first tentative steps into the labor market, they need to understand the difference between gross pay and net pay.
If you use a human accountant to prepare your household’s taxes, take your child to this year’s appointment. This is a simple way for your kids to learn that even parents must make financial tradeoffs – and that not all of the money you earn is actually yours.
If you prepare your taxes online, sit down with your kid and show him or her how the process works. If you or your kid don’t have time to complete the process in one sitting, just show them the ropes as you can. Should you find yourself in the market for a new tax prep portal, grab your kid and check out our regularly updated list of the best free online tax preparation software options, along with our head-to-head-to-head comparison of the three most popular tax prep products: TurboTax, H&R Block, and TaxAct.
If your family uses a certified financial adviser or financial planner, loop your kids in on those meetings too. Get them familiar with any online financial tools you use as well, including your brokerage or robo-advising suite. This goes back to the point I made earlier about transparency and frankness – you want your kids to have the whole picture.
14. Involve Them in Grown-Up Money Decisions
Why stop there? As your kids get older, involve them in grown-up financial choices – without using their input as the last word for any consequential decisions, of course.
There’s no limit to the complexity or duration of these grown-up decisions. The long, multi-step process of buying a house is a perfect opportunity to walk kids through a complex financial transaction that requires months of planning and preparation. Along the way, you’ll have countless opportunities to illustrate specific financial concepts, like down payments and amortization.
Not every family with teens and tweens is eager to move, of course. But buying a house is just one example. Buying a car is another great opportunity – and a more common one.
15. Encourage Them to Apply for Scholarships
The cost of higher education is rising faster than the rate of inflation. According to U.S. News & World Report, the rate of increase in private university tuition outpaced the prevailing inflation rate by more than three times between 1996 and 2015. The rate of increase in in-state tuition at public universities outpaced inflation by more than six times during the same period.
The case for higher education scholarships has never been clearer. For parents and students, every scholarship is a win-win proposition, simultaneously defraying tuition costs and providing crucial budgetary breathing room.
Plus, students are young, and their earning power in the workplace is modest. It’s likely more cost-effective for the average student to apply for a scholarship or two rather than slave away at a minimum wage job (and take crucial time away from studying) to earn a comparable amount. A relatively modest ACT score increase – say, from 28 to 32 – may net several thousand dollars in merit-based scholarships.
Here’s an example. If your kid studies 100 extra hours to raise her ACT score by 4 points and claim a $2,500 scholarship, they’ve effectively earned $25 per hour. Needless to say, $25 per hour is not a realistic wage expectation for most high schoolers, unless they’re coding savants. Traditional service industry jobs rarely pay more than $15 per hour, even with tips. Besides, income taxes further erode wage earnings; scholarships are tax-free.
I’ve seen the power of scholarships firsthand. I qualified for two academic scholarships in high school, collectively offsetting about $2,500 per year in tuition. This was basically a drop in the bucket for my private college, but every little bit helped. And, initially, I put most of my scholarship money into a CD, withdrawing funds as needed to cover tuition payments, buy books, and living expenses. I didn’t get rich on the interest, but it was a nice bonus, and a worthy exercise in self-restraint to boot.
16. Open a Brokerage Account for Them
By the time your kids are in high school, they’re old enough to learn the basics of investing.
Broach the idea of investing their own money with them, making sure to explain the potential risks – that they could lose principal, for example. If they’re interested, set up a custodial brokerage account and have them set aside a modest amount of their own money to invest. Encourage them to research companies they’re interested in, and read market and economic reports, before putting any of their money to work.
If you’d prefer to explore investing strategies other than traditional stock-picking, nudge your kids toward index ETFs and mutual funds with low expense ratios and favorable ratings. It’s easier to build a diversified portfolio – and convey the all-important concept of diversification – with low-cost index funds anyway.
17. Help Them Budget and Apply for Student Loans
Though it’s likely to be among your kids’ least favorite financial exercises, applying for student loans and budgeting for post-graduation repayments is a piece of the financial education puzzle. Kids who aren’t prepared to set aside significant chunks of their take-home pay for student debt service simply aren’t set up for frugal-living success.
18. Teach Them the Three Types of Personal Savings
Before they leave the nest, make sure your kids understand the three main types of savings: personal, emergency, and retirement. Give them an overview of each type of savings – what it’s for, when to contribute, and (most importantly) when to draw upon. If you need guidance, check out our article on the three types of savings.
19. Encourage Them to Open a Student Credit Card Account
Last, but not least: When your kids are old enough, encourage them to open a student credit card account.
Responsible credit card use is actually an effective savings strategy. When you pay your balance off in full each month, you avoid costly interest charges that eat away at your budget and stunt the growth of your personal savings.
But that’s not the only reason you should consider nudging your young ones to apply for a credit card once they’ve reached the right age. Many entry-level student credit cards earn cash back rewards on spending – usually 1% to 1.25% on every dollar spent, and sometimes more on spending in select purchase categories.
Some credit cards promise extra rewards for diligent students. One popular option, Discover it for Students Card, pays out a $20 bonus every year you keep your GPA above 3.0.
Encourage your kids to save their earned credit card rewards. This simple exercise can add up fast: If your college-age child charges $5,000 per year to a Discover it for Students Card account that earns an average of 1.5% cash back and maintains a 3.5 GPA, they’ll put away an extra $95 per year. For the typical ramen-chomping student, that’s a pretty good haul.
If you’re not surewhich student credit card is right for your youngster, check out (or ask your kid to check out) our regularly updated list of the best student credit cards on the market today.
Kids are like snowflakes – they’re all different. So are parents.
You might not agree with every piece of advice I’ve collected here. That’s perfectly fine. As a parent, you have wide latitude to teach your kids the value of money and instill sensible spending and saving habits.
However you choose to teach your kids to save, never forget that it’s in your financial interest to ensure that they know how to manage and grow their own money for years to come. After all, you might rely on your kids’ thrifty habits to support you long after you hang up your hat for good.
What are you doing to teach your kids about the value of saving? Do you have any advice for parents or parents-to-be?