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How to Teach Your Kids to Manage Money

Dave Ramsey's best-selling "Financial Peace Revisited" offers practical tips
for parents to help their kids learn how to work, save, spend and give

One of a parent’s most important roles—a role for which many parents may feel inadequate—is teaching their kids about money: how to use it wisely, and how to save it.

Managing even a modest amount of money gives young people valuable decision-making opportunities. With proper guidance and through the inevitable trial and error process, educating, motivating and empowering children to become savvy spenders, savers and investors will help them keep more of the money they earn and do more with the money they spend.

For most kids, investing decisions can wait. But developing, at an early age, the discipline and restraint associated with saving and spending can help them achieve financial success and avoid the pain of burdensome debt and continuously having more month than money.

Recent statistics illustrate the financial difficulties that many young adults face:

  • 19% of Americans between the ages of 18-24 declared bankruptcy in 2001 (USA Today)

  • The fastest growing group of bankruptcy filers are people who are 25 years of age or younger (U.S. Senate Committee on Banking, Housing and Urban Affairs)

  • In 2002, 68% of high school seniors surveyed failed a basic financial survey (up from 52% in 2001), and only 10% scored a "C" or better (Jump$tart Coalition for Personal Financial Literacy, 2002 Annual Summary

  • Nearly half (49%) of college-age adults said they believe they are more likely to become millionaires by starring in a reality TV series than by learning how to budget and save wisely (Visa USA)

  • 83% of adults are unaware of the resources available to help them teach children practical money skills (Visa USA)

Regarding the last bullet point regarding resources for parents, the Internet is full of them (just Google the phrase “teach kids about money”). There are also some very useful books on the subject, including chapters 16 and 17 of Dave Ramsey’s New York Times best-seller, "Financial Peace Revisited."

Here are some of the highlights:

Your children are watching you. According to Jump$tart, 94% of children learn their money management skills, for better or for worse, from their parents. “The most important thing we as parents can do to teach our children,” writes Ramsey, “is to straighten up ourselves and show them what we are doing and why we are doing it.”

Four money issues. Be intentional about your money instruction, and build your teaching around four key areas of money management: (1) work, (2) saving, (3) spending wisely and (4) giving.

Work. There must be an emotional and intellectual connection between work and money. “Never use the word ‘allowance,’” warns Ramsey. “Instead, pay ‘commissions.’ Life will not make ‘allowance’ for you, but it will pay you want you earn. Work, get paid; don’t work, don’t get paid.’

Saving. Developing the discipline of saving is one of the best ways to avoid the punishment of debt. It helps you plan for making big purchases, and it helps instill the ethic of goal-setting. Since kids tend to like games, make a game of it, advises Ramsey. “Simply divide the price of the goal by the amount you plan to save each week to see how many weeks or months it takes to ring the bell.”

Spending. People tend to spend differently when, instead of borrowing, they spend the money they earned. “Spending is one of the rewards of disciplined saving and working,” writes Ramsey. “It can be the celebration of a goal reached. When spending occurs in this way, the child’s self-esteem is maximized, because he or she did it. There is a sense of accomplishment, of a job well done.”

Giving. “Giving is precious to watch when the kids are young, and fulfilling to watch as they grow into adulthood. Giving makes them less self-centered [and] brings your kids depth of character. Those who never give become shallow, self-centered, and miserable adults.”

Age-appropriate money management. "Financial Peace Revisited" offers training tips by age group.

For three- to six-year-olds, Ramsey recommends that “commissions” be paid on the spot, immediately after work is performed. “Children need to have instant ‘atta boys’ and money for work. This allows them to make the emotional connection and they are more willing to do the chore next time.” With respect to saving, the saving goals should be achievable in a relatively short time period, so that the payoff for saving isn’t so far into the future that it seems out of reach. “When they have saved and they buy it, there is a sense of pride that will make you smile a lot more than if you simply bought it for them.”

For ages six to 13, their ‘commission’ should be paid weekly, based on a tracking system that lists their chores and what they will be paid for each. Granted, many household chores are tasks that kids should do because they are part of the family and at no pay—such as cleaning their room, taking out the trash, etc.—but , writes Ramsey, “Paying for them gives you teachable moments about money and helps make the emotional connection between money and work.” On payday, says Ramsey, the kids’ should divide their pay among three envelopes or containers: one for spending, one for saving, and one for giving.

“Spending and giving at this age fosters problem-solving skills as the goal setting can get really detailed,” Ramsey writes. He noted that, for his kids, saving started to get serious at this age because he and his wife would not buy cars for their teenagers or let them to buy a car on credit. “Our first child started saving for her car when she was 10. By the time she was 14 she had picked out the kind of car she wanted.” By the time she was of age, she had saved $4,500, which her parents matched. “She and I shopped for months until we bought a really nice Mustang at below wholesale book for $9,000 cash.”

For kids who are 14 and older, budgeting can become even more serious. Ramsey suggests that, money-wise, parents should treat kids at that age “as adult as they are acting.” He recommends that “if you have them ready and their temperament is correct, release their own budgets to them”—while retaining parental veto power. “We opened a checking account for them with a debit card. We then established what portion of our budget was going to their clothes, entertainment, etc. Then we explained to them that, from now on, we were no longer paying for virtually anything directly, but we would be giving them X dollars per month to live on. If our daughter buys one dress and blow it all, she can’t go to the movies. If our son eats at expensive restaurants with his friends, no new clothes for school.”

Ramsey concludes his discussion of helping kids become money-wise by noting that “you are teaching your children how to live life well when you build their character and money management skills. Teach your children how to handle money or they will come home and live with your forever.”

If you have been procrastinating in teaching your kids about money, perhaps the vision of having adult children permanently camped out in your house will be sufficient motivation to start investing some of your time and mental energy into your young kids’ evolution to responsible money managers!