Do you remember how you learned about money?
As a public health professional, I spent the early part of my career helping people create healthy and sustainable behavior changes to lift themselves and those around them out of poverty and poor health conditions.
In my mind, financial illiteracy is a public health issue.
And if you are like me, you didn’t learn about money from your parents, nor did you have a key role model for money in your life. You learned how money “really works” late in life through trial and error.
This is why I’m so passionate about educating others about money, wealth, and how to empower the next generation to maintain and grow wealth.
Five Money Lessons Every Kid Should Master
So, how cool would it be to teach sound money principles to your kids and put the power of time on their side? But where do you start? Here are five money principles I’m teaching my child right now:
Asset vs Liability
Before you can launch into a full-blown conversation on how money works with your child, it’s essential to help them understand the difference between an asset (something that puts money in your pocket) and a liability (something that takes money from your pocket).
Surprisingly enough, kids grasp the concept at an early age that buying a new action figure at Target every time they visit the store costs money rather than giving them money.
For help on how to drive home this concept, consider playing the education board game CASHFLOW for Kids. We started this with our daughter when she was three and a half.
How to Provide Value
Another concept to warm your child up from an early age is how they can provide value around the house. This will look different at every age. To start, I suggest incentivizing personal responsibilities like brushing your hair, brushing your teeth, taking a bath, making your bed, and making breakfast. While you may not want to pay your high schooler to do such mundane things, at age one and a half to two this is an easy concept for kids to understand (and wouldn’t you just love that they are able to take care of themselves earlier).
Next, transition into age-appropriate household chores and/or incentivizing academics while moving the more executive functioning items into a daily routine that must be accomplished. As they age, you can start incentivizing “business driving” activities like working in your business, creating their own business (lemonade stands and jewelry stores!), or providing value for others in your community (babysitting, pet sitting, mowing lawns, cooking, etc.). We created a simple “You Got Caught Doing Something Good” token system that can be redeemed for privileges and exchanged for money. There are several apps like BusyKids that will help you track what chores are completed.
How to Store and Track Money
Once your child has some money (or tokens) coming in through providing value, it’s time to teach them how to store and track their money in an online account. My favorite online app to store my kiddo’s money is TillFinancial.io as it makes the next step so much easier.
How to Allocate Money
The next principle to help your kiddo master is to create habits around saving, giving, and spending. This is also a wonderful time to read the timeless classic The Richest Man in Babylon to them (or with them). In our house, we divide up funds into three buckets: 40% savings, 10% giving, and 50% spending and will adjust this as our daughter grows older and her needs change.
How to Spend Money (According to Values)
Now comes the fun part… Helping your child understand how to spend money wisely! Every three months, have your child draw (tap into their creative side!) what they would want in three categories: what they want to learn, what they want to do (or where they want to go), and how they would like to give back to their community.
Notice that there isn’t an “I want a new bike, toy, car” category. This “dream session exercise” helps train them to think through how a purchase helps them reach an outcome they want, rather than seeking the dopamine hit that comes with a random purchase (or keeping up with their friends on the latest trends).
The cool part is you help them spend according to what they value most in life. For example, my daughter turned down a sweatshirt purchase recently because she is saving to go to Space Camp this spring. This is a fantastic skill to learn now, as it will help them live a happier, healthier life later.
While mastering the above money principles is necessary for building generational wealth, there is another key variable in play here. Time. Time to grow a portfolio is one of the large variables that impacts wealth accumulation (just ask investors Warren Buffett and Ray Dalio). It’s never too late to teach your kids about money—the earlier you start the better (what I wouldn’t give to have an extra 20+ years like my daughter does to build my wealth!).
Once your child masters the initial five principles above, it’s time to help them understand how to have their money make more money (a topic for a future article!).
However, what I’ve enjoyed most about watching my daughter master these basic money principles is seeing how quickly she has applied them to her life. Even at age ten, she understands how to create, keep, and grow money.
As a parent, I feel extremely confident about her stepping into the family real estate business one day and growing our portfolio for future generations to come!