Updated on 03.24.16

Building a Good Personal Finance Mindset in Your Children

Trent Hamm

I currently have three children, all of whom are elementary school age.

My oldest is in fourth grade. He loves doing things outdoors and is probably the most athletic of our three children. He also loves to play games – both electronic games and board games – and enjoys reading fantasy novels. Of the three, he’s the most interested in giving to others, as he’s donated significant portions of his pocket money to charity.

Our middle child is now a third grader, and she’s passionate about art. She is constantly covering every table in our home with some kind of art project, whether it’s an elaborate drawing, an origami project, a bead bracelet, or something else. She’s probably the most natural “saver” out of the three children, as she’s quite willing to wait for months before buying anything with her pocket money.

Our youngest child is a kindergartener. He’s probably the most social of our three children and really enjoys just doing things with others. He often tries to draw our family into larger group activities and outings. He’s also the most headstrong of the three children and the one most likely to just pick himself up and try again if he fails at something the first time.

With children this different, what exactly can we do to teach them personal finance lessons that will really resonate with all of them? It’s not easy, to be honest.

Over the last few years, Sarah and I have come to the realization and agreement that, rather than bogging down our children in a bunch of specific personal finance details, we’re going to focus on just a few very key principles and hammer them home.

Here are the five key principles we’re teaching our kids, how we’re making it work, and some of the little tactics we’ve found useful with our various children.

Principle #1 – Spending Less Than You Earn Is Your Ticket to Personal Freedom

The idea here is simple: If you consistently spend less than you earn, you won’t have debt, you’ll have plenty of money to invest for the future, and before too long you’ll have an abundance of opportunities in your life, whether that means early retirement or switching careers or something else entirely.

For our children, the idea of “retiring early” seems pretty far out there. Even the idea of a career is something that’s really beyond their level of worry right now. Instead, Sarah and I try to look for ways in which our children can appreciate the value of having more options later on if they make a smart choice right now.

Here are some of the tactics we use to reinforce this principle.

We require that they save at least a portion of every dollar they get. This seems a little heavy-handed, but the purpose of this is to normalize the idea of savings. Saving a little bit for the future is just something you do whenever you get income, because the future is never clear. By doing this, you are naturally enforcing the “spend less” part of the equation.

We discuss the purpose of and goals for their saving. Naturally, children aren’t the most forward-thinking individuals out there, so we talk quite a bit about the reasons for not spending everything you have. For starters, you might be saving up for something specific, a big thing that you can’t afford with what you have on hand right now. Similarly, not spending money on meaningless things right now means you’ll have cash on hand later on if something truly special comes along – like, for instance, a 75%-off sale on art supplies for my art-loving daughter.

Whenever Sarah or I make an obviously frugal choice, we describe the reasons behind it to our children. How do these things translate into adult life, though? Since we encourage our children to spend less in their daily lives, we like to point out to them when we do the same thing. Whenever Sarah or I make an obvious frugal choice, we make sure to point it out to the children.

For example, I once took my two older children on a grocery trip where I basically pointed out every single decision I made that reduced the cost of our bill and kept track of each savings on a piece of paper. At the end of the trip, the total savings was nearly $60, something that my kids remember and that I bring up on occasion.

Principle #2 – Spending Your Money on Forgettable Things Is Something You’ll Regret

With the first principle, we covered why it makes sense to not spend all of the money you get, but what about simply making smart choices when you have a few dollars in your pocket? The reality is that some things that we spend money on have more meaning and value than other things and sometimes it makes sense to skip out on less meaningful purchases so that we have the resources for better things down the road.

Here are three strategies we use to help our children see this principle in their lives.

After they spend some money, we’ll ask them a few days later if they can even remember what they spent it on. Let’s say, for example, that my youngest son has $3 in his pocket and wants to buy some candy at the store. I encourage him to wait for something else, but he’s insistent that he really wants this candy, so I relent.

The truth is that a big lecture about being smart with your money right then isn’t going to really help at all, especially given my son’s stubborn streak. Instead, I use a different strategy.

A few days later, I remind him that he spent his extra money on something. Half of the time, he doesn’t remember what it is, and the other half of the time he usually regrets what he spent it on. He’d rather have the money and the opportunity now than the candy in the past. Repeating that little exercise when it happens reinforces in his mind that it’s a good idea sometimes to wait, even if you want something in the moment.

We then look at how that spending cut down on the money they have for other things. Let’s say my son spends $2 on candy, leaving with only a dollar to spend on other things. A few days later, we’re at the store and they’re selling a toy that he wants for $3. Rather than saying nothing, I take this as a learning opportunity. I point out that toy for $3 and tell him that if he had waited instead of spending that money a few days ago, he could have this toy now. I let him think on his own about the relative values of things and the value of waiting around for better opportunities instead of spending his money at the first window of opportunity.

We don’t “make up for it,” allowing them to learn from the regret. Sometimes, children get upset when they realize that they’ve made a spending mistake like this. It can be really tempting to give them a few dollars to “make up” for that mistake so that they can have the thing that they want, but I actually consider this kind of regret to be a valuable lesson. Instead, I encourage them to calm down and if they’re having a hard time getting their emotions under control, I’ll exit the store quickly with them. Regret can be an incredibly powerful tool for self-teaching.

Principle #3 – Most of the Best Things in Life Are Free (or Close To It)

One thing that Sarah and I often worry about is that our children will begin to equate money as being a necessity for having fun and enjoying good things in life. It’s not true at all – there are many, many wonderful things out there in life that don’t require money.

As always, a big part of making this type of thing clear to our children is by doing, not by telling. Here are three methods for making that happen.

We do lots of free things together as a family. It’s simple – we do lots of things that don’t require spending. We go to state parks and hike on the trails. We play games. We go to the library and check out books to read and movies to watch. We go to community festivals and free concerts. We go geocaching and hunt for mushrooms in the woods in the spring. Most of the things we do for fun cost virtually nothing.

When we do something that requires money, we reflect on that fact and whether the experience was “worth it” compared to the free things. We don’t usually do this in the aftermath, but instead we hold onto it until the next time we’re thinking about doing something together as a family. We’ll point out different options, but we’ll also mention that one option is free while another option will cost $80 for the family. Often, when our children hear that, the advantages of the free thing become really clear. The expensive thing might have been a lot of fun, but it usually wasn’t “worth it.”

We intentionally speak more positively of free and low-cost things. Often, our enthusiasm and outlook for various things and various activities does a lot to shape the enthusiasm of those around us. If you’re excited about something, that excitement rubs off. If you’re positive about something, that positivity rubs off. If you’re negative, that negativity rubs off, too. Keeping that in mind, we make a conscious effort to be very positive about activities that are free, not just as a money-saving tool in the moment, but also in terms of creating a positive perspective on those kinds of activities in the hearts and minds of our children.

Principle #4 – Focused Work Is the Most Effective Way to Earn the Most Money for Your Time

I’m a huge believer in the value of focused, deep work. When you shut down distractions and work very intensely on a task, whether it’s an ordinary household task or learning or challenging work tasks, focusing on that task gets it done faster and better than working in a distracted or unfocused way. The stronger your ability to focus on the task at hand, the greater your ability to earn a good income, period. You’ll also have more quality free time in your life as well.

Here are three strategies I use to imbue this concept into my children’s lives.

We set artificial time limits to encourage focused work for a non-monetary reward. For example, let’s say my oldest son’s room is messy. I’ll tell him that if he can have his room clean enough to present to guests in ten minutes, we’ll go over to the soccer field and kick the ball around until supper, but if he takes longer than that, we won’t have time to go. The goal of this is to encourage focus. He can easily get his room ship-shape in ten minutes if he focuses, but it’s often easy to get distracted and unfocused. Practicing focused work is invaluable, and that’s the purpose of these kinds of artificial timelines and non-monetary rewards.

In the absence of that reward, we point out the value of being focused on the task. What about times when there’s not a reward – in other words, most of the time? In those situations, I encourage focused work, but when the children fail to focus, I point out how their lack of focus is causing them to lose time where they could have both uninterrupted fun time and a parent that is proud of them. Dawdling just makes everything take longer, irritates others, and reduces the time you have for actual fun things. I use this as a key part of motivation when they need it for their chores. If they do it with focus, they’ll get it done quickly and they’ll get it done correctly, giving them plenty of time for the other things they might want to do.

We offer them opportunities to earn small amounts of money from extra tasks beyond their normal household responsibilities. This is essentially a tool to get them to practice focused work. We have a “job board” at our house where the children can earn extra cash for tasks that go above and beyond the norm. If they do it at a lazy and unfocused pace, they won’t make much – maybe $0.50 per hour of their time. If they focus, however, they can actually do pretty well at those tasks. I point this out to them whenever they decide to take on a task.

Principle #5 – Make Your Unspent Money Work for You

The natural end result of the above principles is that children will have at least some money that they put aside for the future, which is a good thing. The next step, then, is how to demonstrate the idea that money saved for the future actually works for you in a significant fashion. For example, if they put $25 in a typical savings account for a year, they’ll earn a quarter – that’s good, but it might not be that impressive to a child.

Here are three strategies we use to drive home the value of saving for the future and the power of compound interest.

While we don’t share specific balances, we often talk about our investments in front of our children. Our children are aware that Sarah and I have put away at least some of our income for retirement. We also make it clear to them that the money we put aside for the future actually grows while it sits there. The money we save earns more money, and that money earns money as well, and so on. We don’t talk about this phenomenon in terms of dollars and cents and account balances, but we do mention things about how our retirement has gone up by thousands of dollars on its own over the last year because of the money we chose to save when we were younger.

We relate the money we invest with to the things we choose not to buy. When we talk about investments, we make sure to strongly mention where that money came from. It came from not buying less important things. It came from not buying a soda at the gas station and not buying a cool new video game. It came from making supper at home instead of going to some restaurant. It came from spending a day wandering around at a state park on the trails instead of going to a movie in a theater. It came from choosing lower cost options that were still fun and realizing that those lower cost options have the big added benefit of making our lives better in the long run.

We encourage our own children to save their money, sometimes even with additional help. When our children have money that they’ve saved on their own, we have them put it into savings. Now, as I mentioned above, that doesn’t return very much money to them, so instead we offer them some “parent-sponsored interest.” Basically, we pay them an additional 1% in interest each month. If they leave $25 in their savings account for a month, we’ll put a quarter into their account for that month. This is based on the lowest balance for the month. That way, they can see interest working in their favor at a time scale that’s more applicable to children.

Final Thoughts

If there’s one overall point to take away from all of this, it’s that our personal finance lessons aren’t delivered as “lectures,” but are integrated into our everyday life. It takes the form of actively doing things with our kids, or in the form of dinner table conversations that they either overhear or participate in.

We try not to fall into the trap of simply telling them what to do, but making it a normal part of household conversation and making it a part of things they would do normally, like normal household chores and the like.

The more that sensible personal finance is seen as a normal part of adult life at home and the better it’s integrated into the way they live their lives as they progress from childhood through their teen years into adulthood, the more likely it is that it will be a normal part of their lives.

For us, that means children with a better shot at being successful in the world. That means children who are less likely to have to rely on their parents to get by financially. That’s our true goal in the end.

You’ll notice that none of these strategies really center around “lecturing” our kids about money. That’s because we’ve learned that they’re not really receptive to that at all. They’re much more likely to learn something by doing something themselves to see how it works, or learning through a conversation, than learning through being told a bunch of things.

Similarly, children are pretty effective detectors of hypocrisy. These tactics don’t work unless you’re actually living them in your own life and can show them to your children. Telling your kids to do one thing and then immediately doing something else is a sure way to not only sow mistrust, but also to tell your children that the things you’re saying aren’t actually things to put into practice.

In other words, if you want your children to act in a way that leads to financial success, you need to do it, too, and you need to do it in ways that are clear to them. You teach them how to be adults by example, in other words.

It’s a real challenge, but it’s also a rewarding challenge. Good luck.

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