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  • Writer's pictureDamon C Collins, MBA, AAMS®, CFEI®

Make Your Kids Money-Smart

It's not about how much money you have to pass on to your kids – it's about passing on money-smarts. Teaching your kids sound financial knowledge can help them make smart financial decisions now and in the future.

Like everything you teach them, some key concepts and topics create a foundation they can grow from.

Understanding the Basics

Research has shown that most of our money habits are developed as children. (1) There are many ways parents can influence those habits, both by addressing them directly and by simply including children in day-to-day financial decisions and processes. The following are money management principles that set everyone up to be successful:

• Learning how to wait while saving to afford something they want.

• Understanding the concept of the 'future.'

• Dealing with delayed gratification.

• Avoiding impulsive, irreversible decisions.

Differentiating Needs and Wants

An effective way to help kids understand the difference between needs and want is to make it tactical.

1. Simply sitting down with them, grabbing a pen and paper, and having them write down different things they would like to spend money on, and then categorizing each item as a need or a want. This exercise can help them visualize the difference between the two and learn to make the distinctions in day-to-day life.

2. Once you have a working list of things the child needs and wants, you can ask them to prioritize the list by how much they want each item and how much it costs and then develop a savings plan with some very concrete goals and timelines.

Opportunity Cost

Another concept that can be taught early on is opportunity cost. One of the best times to let kids see the opportunity cost in action is at a store.

A few lessons can be taught when kids ask for a toy or piece of candy.

1. First, asking them whether that toy they desperately desire is a need or want can be helpful.

2. After that, explaining that if they get what they want right now, they will have to delay getting something else they want on their list is a prime example of opportunity cost.

The Necessity of Budgeting

Following the introductory conversation, establishing a budget is one of the first pieces in building a solid financial foundation. In's annual budgeting survey, 88% of respondents agreed that everyone needs a budget – but only 80% of respondents have one. (2) The purpose of budgeting is to help reduce overspending, but it doesn't stop there.

By implementing a "save, spend, give" system, kids are shown different uses of money rather than just spending. Setting up a save, spend, give system can be as simple as labeling three jars or envelopes to act as their piggy banks. Every time they receive money, whether an allowance or a gift, a specified percentage goes to each of the three categories.

Once they're old enough to have bank accounts, this process can also be followed. Typically, banks can open accounts for minors once they have reached the age of thirteen as long as a parent or legal guardian signs as a co-owner of the account.

Teaching kids about how to create a budget and the importance of budgeting will give them a head start but also helps them develop a habit they'll hopefully have for the rest of their life.

From Budgeting to Saving… And Understanding Interest

Rewarding children for saving can help incentivize good budgeting habits to show children the positive side of interest. One way to do this is by giving them a small "bonus" every time they put money towards their savings account. Another way to educate them about interest is to ask them if they would rather have $10 thousand now or a dollar that doubles every day for 20 days. Chances are, they will select the $10 thousand. Now you get to show them the power of compound interest, which is interest you earn on top of interest. By taking that dollar and doubling it every day for 20 days, the ending balance ends up being north of $5 hundred thousand. (3)

Compound Interest can be calculated daily, monthly, quarterly, or annually. It depends on the type of account and the terms of the bank or brokerage firm. The key is to introduce your kid(s) to how powerful compound interest can be for saving. It is wise to show different compounding interest scenarios and outcomes.

One way to show the negative side of interest may be for the parent to act as their kid's lender if they don't have enough money for something. By charging them a little interest, they can see that it's more expensive to buy something if they don't have the money for it rather than waiting until they have enough saved.

Diving Deeper into Credit – Building It and Keeping Score

When it comes to credit, getting an early headstart on building a credit score can make adult life a little bit easier and iterates the importance of being smart with money. Building a credit score while young is advantageous, and having an existing credit score when entering adulthood can show its benefits immediately. Whether buying their first car or applying for an apartment, a good credit score can save time and money.

One way to enable kids to build their credit score is through a secured credit card. They can only spend what's on the card, keeping them from running up a big balance. Another option that allows for a little more parental oversight is adding them as authorized users on a parent's credit card.

A great way to teach the implications of a credit score is to sign up for a free credit service, such as Credit Karma or one offered by your bank. Pulling up your credit score and walking kids through the different factors that make up the score will give perspective on how much it matters to keep credit balances low and maintain a good payment history.

To go a step further, show them the total cost of buying a home or a car with slightly different interest rates. Since personal finance topics start to become intertwined the further you go, this is another opportunity to touch on their interest and the importance and benefits of having good credit.

Creating Commitment with Investing

There are a few ways to get kids involved with investing. A fun way to encourage them to learn about investing is by letting them play the stock market game. Many different websites and apps can be used, but kids are given the ability to select stocks in a hypothetical account and can manage their portfolios. The SIFMA Foundation has a great version that you can find at

A real-world option is to open a Uniform Gifts to Minors Act or Uniform Transfers to Minors Act (UGMA/UTMA) account. These are custodial accounts that can be opened in a minor's name. This allows both kids and parents to save money and invest while still giving parents control over the account until the child reaches majority age. Both accounts can be opened at a bank, brokerage firm, or registered investment advisory firm such as Collins Wealth Management.

The Takeaway

Teaching kids about money is like teaching anything; it takes time and patience. But the knowledge and lessons they learn will stick with them throughout their lives.

(1.) Financial Capability of Children, Young People and their Parents in the UK 2016. The Money Advice Service. March 2017.

(2.) 2021 Budgeting Survey.

(3.) Calculation by Collins Wealth Management.


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All written content on this site is for information purposes only. Opinions expressed herein are solely those of Collins Wealth Management LLC unless otherwise specifically cited. The material presented is believed to be from reliable sources, and our firm makes no representations of another party's informational accuracy or completeness. Before implementation, all information or ideas should be discussed in detail with an advisor, accountant, or legal counsel.

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