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How to Teach Your Kids About Personal Finance

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9.28.21 |

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‍Set your kids up for a better financial future

Leaving the nest is an exciting time for young adults, but it also comes with a whole new set of responsibilities, especially when it comes to money.

Suddenly, they're faced with the prospect of creating a budget, managing expenses, debt, mortgages, and figuring out how to invest for the future.

The problem? Many simply aren't prepared for these financial challenges. They might feel overwhelmed by budgeting, confused about where to invest, and may even be vulnerable to falling into debt.

Maybe you didn't receive much guidance about money when you were a child, leading to credit card battles and overspending in your younger years.

Financial struggles are common, but they don't have to define your children's future.

You can raise financially savvy kids, no matter their academic strengths, by teaching your kids healthy money habits in a way that's engaging and fun.

What is Financial Literacy?

Before we kick off, let’s look at what financial literacy is and the concerning decline of financial literacy in New Zealand.

Financial literacy is about learning basic numeracy and money management skills such as budgeting, saving, tracking income and expenses, and planning for the future.

A recent study in New Zealand revealed a concerning decline in financial literacy, with only 44% saying they felt financially literate, and a lack of preparedness was evident with many having minimal emergency funds or retirement savings.

Income didn’t seem to be a factor either - households earning well above the national average can be just as financially unaware as those on lower incomes.

Read more about the decline in financial literacy in New Zealand

In an article on financial literacy, which featured in The Reserve Bank of New Zealand’s Bulletin, authors Doug Widdowson and Kim Hailwood said data on New Zealand’s level of financial literacy raise some areas of concern.

“Financial literacy needs to be embedded in the New Zealand culture in the same way that New Zealanders know how to ‘Slip, Slop, Slap’ before going out into the sun, or ‘Buckle Up’ their seat belt before driving their vehicle.”

Prior to the September election, all major political parties in New Zealand agreed that financial literacy education should be compulsory in schools.

Minister of Finance Nicola Willis said equipping people with knowledge about debt, banks, mortgages, and the like "makes sense".

"There's no getting away from the fact that we are in a cost-of-living crisis and I know budgeting services up and down the country are getting more people needing their services. I've visited those budgeting services, and they say to me a lot of New Zealanders have missed out on basic financial literacy and we owe it to them to give them a better chance to get those skills,” she said.

Since financial literacy is currently not compulsory in schools in New Zealand this means education around it falls largely to parents.

So, you might be wondering, how do you teach your kids to become financially literate adults?

The Work-Money Lesson For Kids

Teaching your kids the value of money goes hand-in-hand with understanding how to earn and manage it.

Gregg Murset, CFP and CEO of chore app BusyKid, told CNET the key is to tie money together with the value of hard work.

“The work-money connection is very important because I’ve searched high and low, and I can’t find a job where you can sit, do nothing and get paid,” Murset said.

Pocket money is a fantastic tool to introduce the work-money connection to your child.

Here are some ways they can earn pocket money and develop valuable skills:

Younger Children (Under 12-years-old) and Money:

Light housework: Helping with age-appropriate tasks like setting the table, sorting laundry, making their beds and tidying their room, or putting away groceries.
Simple yard work: Raking leaves, weeding, or picking up fallen fruit.
Arts & Crafts Entrepreneurs: Selling homemade cards, lemonade, or small crafts at a neighbourhood garage sale.

Teenagers and Finances:

Tutoring: If your child excels in a particular subject, they could offer tutoring services to younger siblings or classmates for a small fee.
Gardening and Yard Work: Mowing lawns, weeding gardens, or planting flowers for you, your neighbours, or family members.
Babysitting: Once they demonstrate maturity and responsibility, babysitting is a great way to earn money.
Odd Jobs: Helping with errands like grocery shopping, house cleaning, dog walking, or car washing can be a flexible way to earn some extra cash.
Freelancing: With tech skills, they could explore online freelancing platforms to offer services they are skilled at.

Related articles:

Spend, Give, Save

When your child starts earning pocket money, they may want to spend their earnings at once.

Financial reporter Toni Husbands says she’s taught her kids to execute a spend, give, and save ritual when they get pocket money or birthday money.

“I email them the total amount they’ve received and ask them to calculate the breakdown for their save, give and spend categories. They practise their maths skills by allocating 10% of their income to giving, 10% to saving and 5% to their spending account. The remaining 75% goes toward investing. Once I receive their email, I distribute the amount to their respective accounts.”

Husbands says she opened a high-yield savings account for both children and as the year progresses, she shows them how much interest they’ve earned.

“I doubt they appreciate the power of compound interest, but I emphasise that leaving their money in an interest-earning account adds to their bottom line every month.”

Husbands says she also opened investment accounts for her children and while “they don’t fully grasp the concept yet” she says, “they know that 75% of all income they receive goes into their investment accounts”.

She lets them choose companies whose products they like or use.
Let's say your child loves a specific video game or movie franchise. If that company happens to be publicly traded, you can turn their enthusiasm into a learning experience. You can explore factors like how much the company earns per share (earnings-per-share) compared to its stock price (price-to-earnings ratio). This helps them understand how to evaluate potential investments in a way that's relevant and engaging.

“I deposit the bulk of their investment dollars into an index fund and allow them to buy a few single stocks based on their analysis. We look at the portfolios several times a year -- generally when they receive additional income - and decide where to invest and if we should make any other changes,” she said.

“At this point, I think they just understand that this is money we’ll be able to use someday for a large purchase and that the longer we leave their money in the account, the more interest they earn. But that still puts them leaps and bounds ahead of kids with no investing knowledge.”

Teach Them Young

Whether it comes to music, a different language, sport, or pretty-much anything, it’s easier to learn when you’re young.

Greenlight, a fintech company on a mission to help parents raise financially smart kids, recently released findings from a survey on the state of financial wellness among kids and teens in the US.

The survey found financial stress and anxiety increased as early as 14-years-old as financial confidence drops and all generations want more financial education.

Here are some of the key findings:

A whopping 76% of Gen Z teens experience stress or anxiety about money.
60% of Gen Z teens report daily or weekly financial stress, mirroring the struggles of Millennial (61%) and Gen X parents (58%).
Over half (55%) of Gen Z teens admit to lying about their financial situation.
75% of Gen Alpha kids and Gen Z teens want to learn more about personal finance, compared to 70% of Millennial and 66% of Gen X parents.
When it comes to financial education resources, Gen Alpha and Gen Z turn to parents (75%) first, followed by school and then social media. Millennials and Gen X parents, learned from family (66%), followed by personal finance websites and friends.
Gen Alpha and Gen Z teens report learning more about personal finance from Mom (46%) than Dad (39%).

Jennifer Seitz, Director of Education at Greenlight, said: “While parents and kids alike may be experiencing financial stress, effective financial education can play a crucial role in fostering confidence and preparedness for a better future.”

Murset is a father of six financially responsible adults, so he’s had plenty of experience teaching kids about money.

He believes teaching money skills should be treated in the same way as practising the piano or basketball training and eventually they’ll become “good at it”.

Teaching your child about financial literacy may seem like an overwhelming task. But it could be simpler than you think. Here are some ideas to help get you started.

Money Games:

Create your own play money or use monopoly money. Set up a pretend store where your child can be the buyer or seller. This helps them practise basic maths skills and understand the concept of exchanging money for goods.
Decorate piggy banks and have your child "race" to fill them up with coins or pretend money. This encourages saving and goal setting.
Cut out pictures from magazines or browse online for different items. Have your child sort them into piles of "needs" (food, shelter) and "wants" (toys, games). This helps them differentiate between essential and non-essential spending.
Give your child a small weekly allowance and challenge them to save a portion, spend a portion, and donate a portion. This teaches them about budgeting, saving goals, and charitable giving.
Open a "toy" investment account (without real money) and have your child "invest" in different imaginary companies. Discuss factors like stock prices and company performance.
Teach your children the value of waiting for what they want. Roleplay scenarios where they choose to save their pocket money for a bigger purchase, rather than spending it impulsively on smaller items.

Real-Life Learning:

Take your child grocery shopping and involve them in comparing prices, creating a shopping list, and sticking to a budget. Explain how you make choices based on price and necessity. For example, at the supermarket you might ask your child to compare the prices of milk or their favourite snack.
Before you make a big purchase, you could show them online how prices can vary significantly for a similar product and then explain why you chose a particular product based on price, reviews, reputation, and quality.
Explain to them what it means when you tap your card or phone to pay for groceries. You could tell them about how it is talking to a bank where your money is kept. Explain that your bank looks after the money you earn from working and each time you tap you have less money. This will help them learn that your eftpos or credit card isn’t a bottomless pot of money.
Help your child track their spending (real or pretend money) in a notebook or app. This helps them visualise where their money goes and encourages responsible spending.
Work with your children to set achievable savings goals. You might be planning a family trip and could help them create a savings plan to spend on shopping or activities while they are away. Help them track their progress as this can foster a sense of accomplishment and responsibility.
As they get older, introduce them to concepts like compound interest, responsible credit card use, and debt management.

Role Model For Kids:

Your spending habits can significantly influence your children. You could explain to them how you get paid a certain amount for what you do, and how you use that money to cover essentials like food, water, electricity, and housing, before you spend money on entertainment or a new outfit. This can be a learning curve as they discover what are must-haves versus nice-to-haves.
When you receive an electricity bill, explain how many hours you had to work to pay for the lights and TV to be on in your home.
Create a safe space for questions. Encourage your kids to ask freely about money matters, fostering open communication around finances.

The Bottom Line: Start Teaching Your Kids ASAP

The transition from childhood to financial independence can be daunting for young adults.

The good news is you don't need to be a financial expert to raise financially savvy kids.

By starting conversations about money early, involving them in age-appropriate financial decisions, and fostering a culture of responsible spending and saving, you can equip them with the tools they need to thrive.

Remember, the earlier you begin, the more prepared your children will be to navigate the complexities of money management throughout their lives.

Start small, have fun, and watch your kids blossom into financially capable individuals.