Teaching Children About Money

Contents

1. When the habits form
2. What an allowance is for
3. What the schools measure
4. Cash, cards and the car lot

Brent O’Mara works with business owners and multigenerational families, and in the second kind of family the earliest planning happens in a grocery aisle. A parent stops the cart at the ketchup, hands a child two bottles and asks which one is cheaper and whether the cheaper one has more sugar; a few aisles on, the child adds up what last week’s uneaten apples cost. The scene is composite, but it is close to one the New York Times reported in 2014 from a financial planner in California who shops out loud with her daughters, picking two or three items per trip to narrate, comparing store brands with name brands, and once having the girls price the rotten apples, which came to $15.75 and changed how much the family bought.² The research behind that kind of lesson is the subject of this entry.

When the habits form

The claim most often repeated is that money habits are set early. A personal finance author writing for PBS NewsHour states that children can grasp basic money concepts by age three and that by age seven many of their money habits are already in place, and she finds that parents at public libraries and at expensive private schools ask the same questions about passing those habits on.⁴ Researchers writing in The Conversation report what young children can actually do: in a 2019 Canadian study, preschoolers given five marbles to use on a marble run saved about two for later; in the authors’ own board game, children saved on average two of every three tokens for a better prize at the end; and 90 percent of three year olds saved at least one token. By twelve, they write, children understand the purpose of saving and use devices such as a piggy bank to keep themselves from spending. Children who were asked to budget their marbles for now and later saved more than those who were not, and a simple reminder that saving is an option also helped. The adults in the same study did no better: a 2019 survey of 7,169 Canadians found only half made a budget and a third would struggle to find $2,000 in an emergency.⁷ The Consumer Financial Protection Bureau frames ages six to twelve as the years when children absorb the rules and daily habits that shape how they earn, save and shop, and it recommends that parents think out loud during ordinary money decisions so that children can follow the reasoning rather than draw their own conclusions.¹⁰

Figure

Money lessons by age

1. 01
   3 to 5Small conversations: things in the store cost money, and a piggy bank shows where money goes
2. 02
   6 to 8Leading by example, including trips to the bank and putting unneeded items back on the shelf
3. 03
   9 to 10Games that reward saving and managing money
4. 04
   11 to 13Work outside the home, a savings account and a split between saving and spending
5. 05
   14 to 18Planning backward from a goal such as a car, and the difference between gross and net income

What an allowance is for

The allowance is the standard laboratory. A 2012 New York Times parenting column asked readers what it should cover and concluded that it is for two different things: the expenses and small pleasures a child reasonably has, from clothing to transportation to movies, and learning, which includes the freedom to make a bad choice, spend the savings at the arcade or leave a wallet on the bus. Younger children, rarely out alone, need it mainly to learn saving up; older ones need to budget for necessities as well as treats. One reader recalled growing up with no allowance and no explanation of the family’s rules about money, which made the subject a source of anxiety into her teens.¹ The money involved is not trivial. Money reported a 2019 survey by the American Institute of Certified Public Accountants in which the average allowance was $30 a week, about $1,500 a year and up 38 percent since 2016; 66 percent of parents gave one, four in five expected chores for it, and only 3 percent said their children saved it. Three quarters of parents said its purpose was to teach the value of money, yet a third discussed money with their children once a month or less.³ PBS’s guide for parents describes the mechanics that make the lesson stick: a clear jar rather than an opaque piggy bank, so saving is visible; a folder of receipts and a notebook of purchases as a precursor to a bank statement; a distinction between chores done free as a member of the household and larger tasks paid by difficulty; and a savings goal the child reaches without help.⁵

Figure

The American allowance in 2019

the average allowance, about $1,500 a year

$30 a week

of parents who give one, four in five expecting it to be earned

66 percent

of parents who say their children save it

3 percent

increase in the weekly amount since 2016

38 percent

What the schools measure

The research on outcomes comes from international testing. The National Endowment for Financial Education summarized the 2015 round of the Program for International Student Assessment, in which 22 percent of fifteen year olds in the United States lacked basic financial literacy skills, the country placed seventh among fifteen participating education systems, and average scores were unchanged from the first assessment in 2012. Only about one in ten American students reached the top proficiency level. The gap by income was wide: 3 percent of students from lower income schools were high performers against 45 percent from higher income schools. One finding pointed back to the family: 53 percent of participating students had a bank account, and those students scored on average 42 points higher than those without one. The endowment’s education director called the lack of movement since 2012 concerning and argued for a national set of standards and better trained teachers; its conclusion for parents was not to assume schools are teaching the subject at all.⁸

Figure

American teenagers on the 2015 international test

lacked basic financial literacy skills

22 percent

the United States among participating education systems

7th of 15

high performers from lower income schools against higher income schools

3 against 45 percent

the average advantage of students who had a bank account

42 points

Cash, cards and the car lot

The practical advice converges on making money visible. The PBS NewsHour author hands her thirteen year old $50 in cash for a shopping trip rather than a card with a limit, because a checkout line with more than $50 of merchandise forces a choice, and she cites a study finding people will spend twice as much for the same item with a credit card as with cash. She also recommends letting a child watch a car purchase, as one father did with his ten year old, for the lessons in saving, marketing and loans it provides, and opening a no fee savings account at a local bank as soon as a child has money of his or her own.⁴ The Chicago Tribune carried a guide from a credit scoring company that moves by age: small conversations and a piggy bank from three to five, example setting from six to eight, games from nine to ten, outside work and a savings account from eleven to thirteen, and for teenagers a budget built backward from a goal, with the difference between gross and net income taught along the way.⁶ The CFPB’s Money as You Grow program, which grew out of a presidential advisory council and research with two universities on children’s financial development, organizes the same material as milestones and conversation starters by age.⁹

What comes next for the subject is the teenager with an account. The testing data say the bank account is the single marker most associated with a better score, the age guides all end with a job and a savings account in the early teens, and the allowance research finds that the lesson is in the decision, not the amount. In families where the inheritance ahead is large, the subject of the great wealth transfer, those small decisions are the rehearsal; a family wishing to discuss its money together as the children grow finds the format under the entry on family meetings, and the first thing the adults can model is the habit described under cash reserves in a financial plan. How much of its own finances a family reveals to its children, and at what age, is governed by individual circumstances; once real money changes hands, the gift and trust questions are for qualified professionals.