So, what can you do to encourage financial smarts in your kids? First up, lead by example. Children are social learners, which means they learn from their environment and from those around them. Secondly, talk to them. According to the government’s Money Smart website, eight out of ten young Australians talk about money with their parents – and those that do know more about the way money works and how to deal with it better (1).

In this article, we’re going to look at the various ways you can introduce discussions about money into everyday life with your kids. Whether they’re tiny tots playing shop or they’re teenagers thinking about getting their first credit card, you can give them the financial skills they need to better cope with money as they grow.

Invisible Money

Can you remember your parents teaching you about money? Whether they did or didn’t, the lessons you would have learned back then would be very different to the ones you would learn today. Back then, the concept of money was pretty clear. You would see money changing hands every day. It was a tangible thing that your parents earned, and then saved or spent.

For kids growing up today though, money is less and less visible.

As adults, when we get paid, our paycheque is deposited straight into our bank account. From there, that money gets moved around as needed, with pretty much everything happening online. We may set up direct debits to pay our mortgage and other bills, we might put some of it towards our savings, and what’s left will likely be spent using our debit cards as we go about day-to-day life.

Throughout all of that, there is no actual money changing hands. It is ‘invisible money’.

For kids watching – and make no mistake, they are watching – it can be hard to comprehend. Money is now such an intangible concept, understanding the true value of it – from earning it, to saving it, to spending it – can be very tricky indeed. And, if you don’t understand the true value of money, it can make it very difficult to deal with it responsibly.

Obviously, as we move ever-forward towards a cashless society, we’re only going to use cash less as time goes on. Which means we need to teach kids now about how to deal with their own ‘invisible money’ as they grow up. How can you do that? Let’s take a look.

Finding Time To Talk About Money

Talking about money doesn’t mean sitting your kids down to have one serious discussion. When it comes to something like money, learning happens over time. In general, kids learn less from talking about something formally, and more from practical observation and action.

So, what you can work on doing is building money awareness into everyday conversations, to then get your kids to act out dealing with money according to what stage they are at. While we’ll look specifically at learning opportunities and activities for each age group later, here are some ways you can start to introduce the value of money to younger kids within real life situations, to show you that these kinds of lessons don’t need to be stressful or structured.

If you’re at the supermarket, you can start by explaining to your kids how items are priced. This could mean looking at the cost of the things you are buying, and how there are cheaper and more expensive versions of the same product. From there, you could talk about how you can shop around to find the best price. At the checkout, explain that even though you are using your card, you are spending money that you have earned.

If you’re at the ATM, you can explain to your kids that you are taking money out of your bank account that you have worked hard for. You can say that (unfortunately) an ATM is not a machine that gives out free money – and by taking money out, you have less in your bank account to spend later.

If you’re paying bills, you can talk to your kids about how using electricity or the internet at home costs money. If your quarterly electricity bill is $500, you can explain how many days you have to work to pay that bill, helping your child to understand the correlation between time spent at work and what it needs to be used for.

If you’re doing a budget, you can involve your kids in the discussion. This can introduce them to the fact that there are everyday bills to pay such as your mortgage and phone bill, and that fun things cost money too. You can show them how much your family has to spend per week, how much you want to save, and how to make the right choices when it comes to spending.

Learning About Earning Money

You can’t spend money without earning it first, so let’s talk about how you can teach your kids about the value of money by allowing them to earn it themselves. While there are different ways of approaching this, lots of parents choose to give their kids pocket money. If you choose to give your kids pocket money, you will need to decide how they will earn it.

Some parents simply give their kids an allowance, with nothing expected in return. However, you may choose to ask your kids to perform certain chores around the house to allow them to earn the pocket money you give them. This can provide a valuable lesson for kids, showing them that they don’t get something for nothing.

Aside from instilling a good work ethic in them – after all, they will not get their pocket money unless their chores have been done correctly – it can also make the money they earn so much more rewarding. By working hard for that money, it means more to them. Unsure how much pocket money to provide? Talking to other parents could give you a starting point.

Learning About Saving Money

Learning how to save is an essential skill – and one that many adults don’t have. By paying your kids a dollar here and a dollar there for chores around the house, they can learn to save what they earn so that it grows into a more meaningful amount. So, instead of simply spending as they earn, buying little – probably useless – things, they can save up for something they really enjoy.

Younger kids may start saving with a piggy bank. Using a clear jar rather than a traditional piggy bank can be a good idea, as it allows them to watch as their money grows. Older kids may be more interested in having a bank account to put their hard-earned cash into, so check out the various options out there to find one that works for you.

Learning About Spending Money

Most kids go through stages of wanting to spend, spend, spend – and usually, it’s your money they want to spend rather than their own. If you give into their requests too often though, impulse buying can become an issue. By teaching them to hold off on buying something, it can help them make wiser decisions in future.

Say they see a stuffed toy they really, really need. You could give in and buy it for them just for the peace it will provide. However, getting them to wait a day or two lets them take some breathing space to decide whether or not they really need it after all. If they decide they simply can’t live without it, tell them to look out their piggy bank.

If piggy has enough money to cover the cost, explain that by using that money they will not be able to use it for anything else. If piggy is lacking, talk to them about what chores they will need to do before they have enough money to buy the stuffed toy.

Learning About Credit

At this point, you have the choice of whether you want to introduce the idea of credit to your child.

• Option 1: let your child complete the chores needed before buying the stuffed toy.
• Option 2: buy your child the stuffed toy under the agreement that a certain number of chores will have to be performed in the future so your child can pay it off.

Which option you choose will likely depend on how old your child is – and how likely you think it will be your child conveniently forgets about those chores after getting the beloved soft toy home.

Either way, learning about credit is just as important as learning about saving and spending wisely. While it may be something that you leave until they are a bit older, teaching your kids about credit can set them in good stead for later in life. So, what kinds of things should you talk about?

Your credit card can be a great place to start. By explaining what a credit card is used for, you can explain how credit works.

1. When you apply for a credit card, your card provider decides how much you can afford to borrow by giving you a credit limit.
2. You can use your card to spend up to that limit, and by doing so, you are borrowing money from the card provider.
3. Being smart with your credit card means spending only what you can afford to pay back at the end of the month.
4. If you don’t pay back the amount you spend each month, the card provider will charge you interest.
5. Any interest applied to your account needs to be paid back alongside the balance.

If you have other forms of credit, this can also come into the conversation. You may choose to talk about how you borrowed money from the bank to buy your home or your car, and you pay back a certain amount each month alongside interest. The concept of interest doesn’t need to be complex, just something the bank charges for lending you money.

Over time, teaching your kids the right way to deal with credit should help them make better decisions when they’re older. Here are some of the more important talking points you can cover.

Always Pay Off Your Balance

Understanding that credit is not ‘free money’ is an important lesson in life. Try to teach your kids that they should only spend what they can afford to pay back at the end of each month – and how easy it is to get into trouble if they don’t.

Different Cards For Different Uses

Credit cards come in all shapes and sizes, so what works for one cardholder may not work for another. It’s important that your kids understand what kind of credit cards are out there, and how they work in different situations. You can use CreditCard.com.au as a comparison tool to show just how different credit cards can be.

Use Your Credit Card To Build Credit

Talk to your kids about your credit score, telling them how you build it up – and what can knock it down. Show them that by using a credit card responsibly they can work on building their credit over time, making it easier to apply for things like a mortgage later on.

The Dangers Of Misusing Credit

Teaching your kids the consequences of not treating a credit card correctly is essential. Not only can it land you in debt, it can also affect your credit score.

Money Smart Lessons By Age

Think your child is too young to learn about money? Research has shown that by age three, kids can grasp the basic concept of money. By age seven, many of their money habits are set (2). If you want to know what you can do to help your kids develop a good relationship with money, starting when they’re young could be a good idea.

For little ones aged two or three, you can start with coins. Let them play with different coins – supervised, of course, as coins are a choking hazard at this age – and tell them what each coin is worth. You can let them trace around each coin and then colour them in. You can pile coins of the same value together, and work on counting them together.

Little kids love playing shop. While this game is great for developing their creativity and imagination, it can also help them to develop the basics of using money to buy things. Using a till and pretend money, you and your child can play customer and shopkeeper, handing over money for the items you buy, to get change in return.

Ages 3 To 5

As they get older, the games – and the lessons – can become more involved. At this age, you can start teaching them about earning, spending, saving and giving. The main lesson they will be learning though, is that they may have to wait to get something they want. Instead of seeing something and getting it straight away, they should learn that won’t always happen. They may have to wait and save up for the things they really want.

This idea of waiting to get something they want doesn’t need to have anything to do with buying. Say you’re waiting in line at the fairground, you could talk about how important it is to learn how to wait for the things you want.

An activity more directly linked to money could involve giving your child three jars, labelled ‘saving’, ‘spending’, and ‘sharing’. Each time your child receives money, whether as a birthday gift or as pocket money, divide the money equally between the jars. The ‘spending’ jar can be used to buy little things like lollies or stickers, the ‘saving’ jar can be used to save up for more expensive items, and the ‘sharing’ jar can be used to give to charity or a good cause.

Setting goals can also be helpful at this age. If your child wants to buy a toy, set this as a savings goal. Make sure the goal is not too high though, or it will get frustrating for them. If the toy is costly, you could choose to match your child’s savings efforts to make it more attainable. Every time your child adds to the savings jar, help count out the money to work out together how much is still needed. This can help them understand the importance of waiting and being patient.

Apps That Can Help

Check out some of the apps designed to introduce numbers and maths to kids, such as DragonBox Numbers. For an app that puts more emphasis on financial skills, take a look at Savings Spree.

Ages 6 To 10

At this age, children can start to learn that you as an adult work to earn money, and that money is spent differently. By that we mean, smaller items like a pair of shoes only require one purchase, while a larger purchase, such as a car, requires multiple payments. This is the time to teach kids that we all need to make choices about how we spend our money.

Up to this point, kids may not fully understand that money is finite. We need to teach them the importance of making wise choices, because once we spend the money we have, that money is gone and there is no more to spend. Aside from keeping up with setting goals and using the spending, sharing and saving jars, here are some ways you can encourage your kids to make wise financial choices within this age group.

In the supermarket, include your child in making some decisions. Talk about buying the supermarket’s own brand of bread instead of the brand name because it tastes the same, but costs $1 less. You can also talk about getting a good deal by buying in bulk, where the cost per item is less than if you buy one at a time.

Another idea involves giving your child some money as you shop. Give him $2 and tell him the parameters of what you need, such as a type of fruit. This provides experience in making choices with money. Talking aloud about the decisions you need to make as you shop can also help your child grasp the concept of financial decision-making. This could involve asking yourself, “Can I get this somewhere else cheaper?” “Do we really need this, or will we skip it since we’re going to Grandma’s for dinner this weekend?”

Apps That Can Help

Around this age, you may want to introduce your child to the concept of digital currency. This can help them bridge the gap between physical money and digital currency, helping them better understand our use of ‘invisible money’. Apps that can help with this include iAllowance.

Ages 11-13

From around this age, you can start getting into the more complicated aspects of dealing with money, such as learning about credit and debt, interest and budgeting. One focus you may want to have is saving, showing your kids that the sooner you save, the faster your money will grow thanks to compound interest.

While the idea of discussing compound interest with your 11 year-old may seem strange, you’d be surprised what you can get across when you use specific examples. Start by talking about long term savings goals, saying that if you set aside $100 each year starting at age 14, you would have $23,000 by age 65. However, if you set the same amount aside starting at age 35, you’d only have $7,000 by age 65. You can follow this up by getting your child to do some compound interest calculations online.

You can also start to introduce your child to longer term savings goals, encouraging them to save up for something more expensive. Doing this will help them to learn about the trade-offs they have to make to reach that end goal, helping them in their decision making. That could mean choosing not to spend money on lollies after school in order to save up for something bigger and better at the end of term.

Apps That Can Help

Allowing kids to experience the world of virtual banking, Bankaroo could be worth looking into for this age group. Offering a virtual bank just for kids, the app really works as an enhanced allowance app, allowing children to set goals, and parents to match a percentage of their child’s savings to act as ‘interest’.

Ages 14-18

According to Money Smart, one in five Australian 15 year-olds can’t apply financial knowledge to real life situations (3). If you want your teenager to reach adulthood with the financial skills he needs to make it in life, it’s not too late to start.

From ages 14 to 15, you could encourage your child to get a job outside the house. Unlike doing chores for money, where they have you to watch over them to make sure they do the job correctly, working away from home encourages more independence, while instilling a work ethic to do each task correctly in order to get paid.

At this point, you may help your child to open a bank account if they haven’t done so already. Involve your child in the decision making, making the choice between banks, according to what each one offers. Also look at the types of accounts available, taking into account fees, whether there is a minimum balance requirement, and if there is the opportunity to earn interest.

Taking into account all they’ve learned about earning, budgeting and saving up to this point, you may now choose to discuss investing. This can help teach them about risk, and how different investments offer different levels of risk – and reward. Keep it simple by comparing stocks and bonds, explaining the basic concept of how each work. Allow them to make small investments – while also making their own mistakes.

Apps That Can Help

When your child signs up for a bank account, they should be provided with an app that not only allows them to track their spending and saving, it should also give you the ability to monitor their finances as well.

From ages 15 to 18, you can start getting into the wonderful world of tax with your child. If your child has a part time job, they probably understand a bit about tax already, but take time to get into how it all works, and what their taxes go towards.

You can also introduce the themes of good debt and bad debt around this time. You can include examples of good debt (home loans, student loans) and bad debt (credit card debt, payday loans), to then talk about why they are termed ‘good’ and ‘bad’.

Credit scores are also worth getting into at this age, especially as your child will soon be old enough to apply for his own credit card. Check your own credit score and show your child the various factors that go towards determining it. Here, you can make the connection between paying off good debt and building credit, and what benefits you can enjoy when you have good credit.

Apps That Can Help

Check out the range of budgeting apps available to show your child how using an app such as this can provide a comprehensive view of their finances. Finding a good app can help them spot trends in the way they deal with money, while also identifying opportunities for improvement.

And that’s it, job’s done. Your child now knows everything they need to know about money.

Kidding. Of course their financial education doesn’t end when they hit 18. Just like you, they will always be learning. But, by setting them up with the right financial knowledge when they’re young, you can put them in a better position as they get older, allowing them to put all those learned skills into use, so that over time they can develop a better understanding of – and a better relationship with – money.

1. https://www.moneysmart.gov.au/life-events-and-you/families/teaching-kids-about-money
2. https://www.pbs.org/newshour/economy/making-sense/money-habits-are-set-by-age-7-teach-your-kids-the-value-of-a-dollar-now
3. https://www.moneysmart.gov.au/life-events-and-you/families/teaching-kids-about-money
4. Photo source: Shutterstock