Beyond Allowance: Teaching Kids About Finances

A discussion with personal finance expert Rachel Cruze

In many families, money and finances are considered grown-up topics. Parents may believe children shouldn’t be privy to the family budget or included in any discussions regarding financial decisions, and while they have good intentions, shielding children from the topic of money can backfire. “Parents have a responsibility to explain finances to their children so that they can understand money matters and grow up to be fiscally responsible adults,” says Rachel Cruze, personal finance expert, author, and speaker.

Lean In to the Discomfort

Many Gen X and Millennial parents want to give their children a better financial future than they had. This sentiment often comes from a good place, but Cruze says it can be harmful in the long run. When parents remove too many obstacles and challenges from their child’s life, kids grow up without understanding concepts like grit, value, delayed gratification, and sacrifice. “By creating no financial boundaries, children fail to develop a sense of how finances work,” Cruze explains. “If you never hear the word ‘no’ as a child, it can translate to becoming an adult who can’t handle money. You may be unable to save or budget because you have never learned these skills.”

Some parents avoid educating their children about money because they feel inadequate about their own financial knowledge. “Parents who are living paycheck to paycheck or financially struggling may think, I’m not a good role model for my kids to learn from,” Cruze says. “But kids can learn by parents being honest about the hard work, struggles, and sacrifices their parents are making to make ends meet.”

Financial Education Begins at Home

Currently, 24 states have mandated teaching some fiscal education classes in schools. But Cruze cautions parents who rely solely on their child’s school to provide this type of information. “These big concepts about finances are best taught in the home by parents,” she says. “Schools can give a broad overview, but each individual family has different financial values and economic means.”

When discussing family finances with children, Cruze’s motto is share, not scare. “Kids need to know that they are safe, and their parents will ensure all of their basic needs are taken care of,” she says. “But it is also okay for them to know if finances are tight or that certain luxury purchases aren’t in line with the family’s values.

Conversations about money should be age-appropriate, too. “When parents say ‘no’ to certain purchases, it is beneficial to be honest about why,” Cruze says. “Parents can explain that they are trying to pay down some accumulated debt or save more now for future spending.”

There’s no reason to feel guilty about telling your child you won’t be going on vacation this year or that an electronic tablet isn’t in the budget. “In the long run,” Cruze says, “it helps kids to know that they can’t have everything they want and that sometimes we make sacrifices or delay gratification.”

Financial Autonomy

Learning how to handle money at a young age is very beneficial allows kids to make mistakes while they still have the safety net of living at home. Cruze says kids as young as 5 can begin learning about money matters. “Rather than using a piggy bank, I like using a large clear jar so kids can actually see the money going in and going out,” she says. Around age 14, she suggests setting up a student checking account.

Introduce budgeting concepts in a simple, straightforward way (i.e., save some, spend some, share some), and give them ownership of their financial decisions with the money they earn or get as gifts. “Having some financial autonomy will help them to prioritize their needs versus their wants,” Cruze explains. “They will become less impulsive and more comfortable with delayed gratification.”

Cruze also recommends teaching kids with physical money like coins and paper bills. “There is something valuable about kids being able to experience and feel real money that helps them to understand the concepts of spending better,” she says. “Digital spending (such as Apple Pay or Venmo) can make it easier to ring up debt because the money doesn’t feel real.”

Using Allowance Effectively

There is a lot of debate over whether or not to tie allowance to household chores and good behavior, but Cruze prefers a compromise approach. “There are some chores that children should complete because they are members of the household and everyone should contribute,” she says. “But there should be other chores that children receive money for completing.”

Chores that go above and beyond will vary by family. An example might be setting the table or making your bed, which is a non-negotiable, whereas helping to do a bigger job, like cleaning out the garage, might be a task the child gets paid to complete. Assigning a dollar value to these tasks gives kids some accountability. “Think of it as a commission system,” Cruze says. “If you work, you will get paid. But if you don’t work, you won’t make money. Kids will spend, save, and give away money differently when they earn it by working.”

Family Values

Beyond what parents say about finances, Cruze stresses the importance of paying attention to how children handle money emotionally. Kids are constantly watching their parents, and they pick up on how money makes parents stressed or unhappy. If finances are tight, be honest. Explain to your children in an age-appropriate way that right now is a season of sacrifice. “Help your children to understand that you don’t always need to spend a lot of money to enjoy yourself,” Cruze says. “Have a family game night, bake together, or bike in the neighborhood.”

RANDI MAZZELLA is a freelance writer specializing in parenting, teen issues, mental health, and wellness. She is a wife and mother of three children. To read more of her work, visit www.randimazella.com.