Make Your Kid A Money Genius (Even If You're Not)

1. Start teaching kids about money early to shape lifelong habits

By the ripe old age of three, researchers at the University of Wisconsin–Madison report, many children are able to grasp economic ideas such as value and exchange, albeit in a very rudimentary way.

Early financial education matters. Children as young as three can understand basic economic concepts, setting the stage for lifelong financial habits. Introduce simple ideas like saving, spending, and sharing through everyday activities and conversations.

• Use a three-jar system for allowance: saving, spending, and sharing
• Play money-related games and read books about basic financial concepts
• Involve kids in simple financial decisions, like comparing prices at the grocery store

By making money discussions a natural part of family life, parents can help children develop a healthy relationship with finances from an early age.

2. Encourage saving through concrete goals and matching programs

Compound interest can make you rich one day.

Make saving tangible and rewarding. Help children set specific savings goals and understand the power of compound interest. Use visual aids and real-world examples to demonstrate how money can grow over time.

• Create a savings chart to track progress towards a specific goal
• Offer matching contributions to incentivize saving (e.g., 50 cents for every dollar saved)
• Use online compound interest calculators to show long-term growth potential

Encourage regular saving habits by automating contributions and celebrating milestones. This builds confidence and reinforces the importance of delayed gratification for financial success.

3. Foster a strong work ethic through age-appropriate responsibilities

Chores should simply be part of everyday family life.

Instill responsibility through chores. Assign age-appropriate tasks to children, emphasizing their role in contributing to the family. This builds a strong work ethic and teaches the value of effort.

• Create a chore chart with clear expectations and deadlines
• Gradually increase responsibilities as children grow older
• Discuss the connection between work and earning money

While chores shouldn't be directly tied to allowance, consider offering opportunities for kids to earn extra money through additional tasks or entrepreneurial ventures. This helps them understand the relationship between work and financial reward.

4. Teach smart debt management and the dangers of overspending

If you can't afford to buy something and you put it on a credit card, when you get the bill, you won't be able to pay it in full. Then you'll be charged high interest payments that can add up to hundreds, if not thousands, of dollars.

Emphasize responsible credit use. Educate teens and young adults about the potential pitfalls of credit cards and the importance of avoiding high-interest debt. Teach them to distinguish between good debt (e.g., student loans for education) and bad debt (e.g., credit card balances for unnecessary purchases).

• Explain how interest works and the true cost of carrying a balance
• Encourage the use of debit cards or cash for everyday spending
• Teach budgeting skills to avoid overspending and reliance on credit

By understanding the long-term consequences of debt, young people can make more informed financial decisions and avoid common money traps.

5. Instill savvy consumer habits and financial decision-making skills

Don't trust advertising.

Develop critical thinking about spending. Teach children to be discerning consumers by questioning marketing tactics and making informed purchasing decisions. Help them understand the difference between wants and needs.

• Analyze advertisements together, discussing persuasion techniques
• Compare prices and features before making purchases
• Encourage kids to research and save for big-ticket items

Practice delayed gratification and teach the value of patience in financial decisions. This helps children develop resilience against impulsive spending and fosters thoughtful money management skills.

6. Prioritize essential insurance coverage for financial security

If you're a parent, part of your job is to plan for what happens when things go wrong—specifically, if you or someone in your family gets sick or injured, or even dies.

Protect against financial catastrophe. Understand and obtain necessary insurance coverage to safeguard your family's financial well-being. Prioritize health, life, and disability insurance based on your family's needs.

Essential insurance types:

• Health insurance
• Life insurance (for income earners with dependents)
• Disability insurance
• Property insurance (homeowners/renters)

Explain the concept of insurance to older children, helping them understand its role in financial planning and risk management.

7. Invest wisely in low-cost index funds for long-term growth

The simplest is also the smartest. Whether you have a 401(k), an IRA, or both, your best investment choice is the same: low-cost index funds.

Embrace simple, low-cost investing. Focus on broad-market index funds for long-term wealth building. These provide diversification and typically outperform actively managed funds over time.

Key investing principles:

• Start early to harness compound growth
• Regularly contribute to retirement accounts (401(k), IRA)
• Choose low-cost index funds or ETFs
• Maintain a long-term perspective, avoiding market timing

Educate older teens and young adults about the basics of investing, emphasizing the importance of starting early and staying consistent.

8. Cultivate generosity and social responsibility through charitable giving

Research shows that charitable giving—particularly when it's voluntary rather than mandatory—actually makes people happier.

Foster a giving mindset. Encourage children to share their resources and develop empathy for others. This not only benefits society but also contributes to personal happiness and well-being.

Ways to promote charitable giving:

• Set aside a portion of allowance for donation
• Volunteer together as a family
• Research and choose charities together
• Discuss the impact of giving on both the giver and recipient

By making giving a regular part of financial discussions and activities, parents can help children develop a lifelong commitment to social responsibility.

9. Navigate college financing strategically to maximize value

The average new college student with debt owes about $37,000 in student loans. But while your kid might have left school with a stunning understanding of chemical engineering, metaphysics, or onomastic genesis in the works of Edna St. Vincent Millay (no, I don't know what that means, either), he probably is baffled by how to pay back those loans.

Plan carefully for college costs. Start saving early and explore all financing options to minimize debt. Understand the long-term implications of student loans and make informed decisions about college choice and major.

College financing strategies:

• Use 529 plans for tax-advantaged savings
• Apply for scholarships and grants
• Consider community college or in-state options to reduce costs
• Understand different types of student loans and repayment options

Have open discussions with teens about college costs, career goals, and the potential return on investment for different educational paths.

10. Model good financial behaviors as a parent

You don't need to be a money genius to raise a money genius!

Lead by example. Children learn financial habits primarily by observing their parents. Demonstrate responsible money management in your own life and involve kids in age-appropriate financial discussions and decisions.

Ways to model good financial behavior:

• Create and stick to a household budget
• Discuss financial goals and trade-offs openly
• Show restraint in spending and prioritize saving
• Admit and learn from financial mistakes

By cultivating a positive money mindset and practicing sound financial habits, parents can set their children up for lifelong financial success.

Last updated: July 27, 2024