8 Ways to Teach Your Kids About Money

By Dr. Jim Dahle, WCI Founder

Most of the people reading this blog are either already wealthy or eventually will be. Many of you have children, and you would like them to also achieve financial success in their lives. Many of you plan to leave them enough money that it almost guarantees their success. One of the greatest blessings of my life was that we became financially literate during my residency, so when we started making the “big bucks” (only about $120,000 initially in our case!), that money landed in prepared hands.

In hopes that the earnings of your children (and any inheritance you leave them) hit prepared hands, here are some methods you can use to teach them about money.

#1 Show a Good Example

Anybody who has had children for very long knows that they pay much less attention to what you say and much more attention to what you do. If you want them to be successful with money, show them what being successful with money looks like. Work hard, spend intentionally, align your values with your time and money, plan like a boss, invest intelligently, and give generously. They'll pick up a few lessons.

#2 Talk About Money

Money can be a taboo subject in our medical schools, residencies, and medical centers—both academic and community. Don't let that happen in your home. Talk about money, starting at a very young age. Ask your kids if they'd rather earn interest or pay interest. Point out that they own McDonald's, Home Depot, and Best Buy (via their 529 or other investments) as you drive by. Tell them, “When McDonald's makes money, you make money.” Talk about why you are spending money on one thing and not another. Tell them “no” from time to time, just because “that sounds like a waste of money.” Open up these channels early so they never think they can't talk about money with you.

More information here:

Age-Appropriate Money Conversations: Teaching Kids Financial Literacy

#3 Give an Allowance

Every family does these differently, and I'm not going to tell you how to do it. But give your kids some money so they can start screwing up with it early on. Katie is better at remembering to do this than I am, but at least by the time our kids are seniors in high school, we don't buy them any clothes, gas, or trivial recreational activities. They buy those themselves with their allowance and keep whatever money they didn't spend. No, they're not in charge of paying for their medical care or vacation airline flights, but let them practice before they're out on their own. And don't save them from their mistakes. I can't believe how carefully my 17-year-old looks at the gas station signs as we drive around. She's probably more of a cheapskate than I am now.

#4 Lemonade Stand

We encourage entrepreneurship in our house, and every one of our kids has done something at some point with it. The most popular option in our neighborhood is a lemonade stand. They go spend a couple of hours on the sidewalk and come back with $14.25. Early on, we don't even charge them for the lemonade powder and water we provide. You'd be surprised how many lessons you can teach with a lemonade stand or lawn mowing, driveway clearing, weeding, or whatever. Pretty much everyone in our well-to-do neighborhood will pay a kid generously to do any kind of work they're willing to do. I bet your neighborhood is similar.

#5 Open Accounts

Take your kids to the local bank or credit union and open a savings account. Maybe a checking account, too. Give them a checkbook and a debit card for it. Take them down there when the credit union gives out cash for grades. Have them go down and deposit birthday checks from grandma. Have them go to the counter and do all the talking when they want to take out some money.

If you plan to give them money like we do, start opening up the appropriate accounts to do so. Our kids all have Roth IRAs. All the money they earn from legitimate paid work goes in there, even if they get an equal sum from us to spend. Our kids all have 529s to help pay for college (my generation will be the last to have student loans if there's anything I can do about it). Our kids all have UTMA accounts as their “20s fund” (part of their inheritance, see more below). I turned off the electronic statements for all of these, so every month or quarter, they actually receive a paper statement in the mail addressed to them. These statements provide a lot of informal teaching opportunities, especially in bear markets.

More information here:

How I Teach My Kids About Money

How to Teach Gratitude to Your Kids

#6 Give with Your Kids

Take your kids with you when you go to help neighbors or serve in your community in some way. Sit down as a family once or more a year to give away cash. They can learn a lot from your generosity and careful analysis. Money isn't for hoarding, and it won't go with you when you go. In our case, we have an annual meeting every December where every member of the family gives input on what charities we're going to support that year. They have to do the research in advance and argue their case. And yes, we give money to a charity just because our kid thinks it's a good idea, even if it isn't one of our favorites.

#7 Teach

As the kids near the end of high school and even as young adults, the teaching becomes a lot more serious and formal.

“Come here, kid, we're going to talk about money for an hour. What I'm going to tell you will be worth millions of dollars to you during your life.”

I actually tend to do it when we're out hiking. They might not remember everything you say, but they'll remember more than you think. And they'll know they can come back to you to refresh their memory as needed. My kids learn about index funds and expense ratios and disability insurance and portfolio construction and budgeting and balance sheets before they leave high school. Have yours? Quit complaining about the high schools not teaching kids about how to manage money and do it yourself. Don't you think it's important enough?

More information here:

When to Give Inheritance Money to Your Kid?

How to Open a Roth IRA for Your Kids (and Should You)?

#8 Leave an Inheritance Properly

Give some thought to how you're going to leave money to your kids. You want to help them avoid the problems you had from being broke as a young adult, but you don't want to ruin them. You want them to have the ability to do anything they want but not nothing. You want them to have improved lives as a result of your hard work and smart decisions. This likely looks different in every family, but follow the general principles in this post and you'll probably be mostly successful.

In our case, all of our kids get a “20s fund” to help them with money in that decade of life when an inheritance is actually most useful. In your 20s, you don't make a lot of money (because you don't yet have any knowledge or skills worth paying much for), but you still have a ton of financial needs/wants—college, a first car, home down payments, a wedding, a honeymoon, a summer in Europe, missionary work, whatever. Some of this “early inheritance” consists of the “parent match” into their Roth IRAs, and some is the college savings in the 529s. But mostly it's that UTMA account. At age 21 in our state, that becomes their money to do whatever they want with it. That's a good exercise for them, but it's also a good demonstration to us of how they'll use any additional inheritance they get.

Then, in our estate plan, they don't get squat for two decades. That forces them to have some kind of career and develop some sort of demonstrable financial habits. If we keel over any time soon, they get 1/3 of their inheritance at age 40, 1/3 at 50, and 1/3 at 60. We set a fixed amount and indexed it to inflation, and everything above and beyond that goes to charity eventually. If we don't keel over any time soon, we can change that plan at any point in accordance with how well they do with their 20s funds. If they truly stink at managing money, there's probably a spendthrift trust in their future.

A wealthy, slightly older friend chose a slightly different approach, leaving their kids trusts early on that could only be used for a few specific purposes. They all chose to use it for a down payment so they could afford to live near their parents. The remaining trust money can be used for anything starting at 35.

Your situation and your kids are unique, so make the plan that's right for them and modify it as needed.

What do you think? How do you teach your kids about money? What lessons have you learned that other WCIers could benefit from? 

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