Last Updated on February 17, 2025
As parents, we want the best for our children. We dream of a bright future for them, one where they’re financially secure and can achieve their dreams.
But how do we instill good money habits in a world that hell-bent on consumption beyond our means?
The answer is simple but not so obvious: we’ve got to start early. Like, really early.
The more your child knows about how money works, the more likely they are to be successful in life, regardless of their career path.
Fact: According to a 2022 study by the T. Rowe Price Group, parents are the number one influence on their kids’ financial knowledge and behaviors. https://corporate.troweprice.com/content/troweprice/en/media-center/press-releases/2022/parents-are-the-biggest-influence-on-their-kids-financial-know-how.html
Fact #2: A 2021 report by the FINRA Investor Education Foundation found that only 34% of U.S. adults could answer at least five out of six basic financial literacy questions correctly. https://www.finra.org/about-finra/initiatives/investor-education/national-financial-capability-study This highlights the importance of starting financial education early.
We think that if our kids become, say, a doctor earning lots of money, everything will be fine. But I know plenty of doctors, lawyers, and other high earners who still spend up to, and often times, much more than they earn. This situation unfortunately leaves them only slightly better off than a person without a high school diploma in terms of life satisfaction.
So let’s walk through five easy ways to introduce easy saving and investing concepts to your young children, even if you’re still figuring things out yourself!
I. Saving: Stashing Your Cash (and Theirs!)
Saving is the foundation of financial freedom. It teaches kids the value of delayed gratification and the power of planning. Without this, none of the other ideas that follow are possible.
- 1. The Piggy Bank Power: A piggy bank is a classic for a reason. It’s a tangible representation of saving. Try to encourage your child to earn money through age-appropriate chores, allowances, or gifts from relatives. Explain that the piggy bank is a safe place to keep their money until they’re ready to use it. However, do not forget to explain that some portion of the money can never be spent. The idea is to get them used to having money without giving in to the always present urges to spend it. After all, you can’t say you have money if…well, you don’t HAVE money.
- 2. Setting Savings Goals: Help your child set both short-term and long-term savings goals. A short-term goal might be saving two times (2X) the amount for a new video game, while a long-term goal could be towards 2X bicycle or even a contribution towards a future pet. I am saying 2X because of point #1. We can’t just teach kids to save money in order to spend it otherwise the lesson of how to have money will be missed! Visual aids are incredibly helpful here. Create a chart with pictures of their goals and track their progress with stickers or colored markers. This makes the abstract concept of saving more concrete and exciting.
- 3. Making Saving Fun: Saving doesn’t have to be a chore! Make it a game. Have “no-spend” challenges where the whole family tries to avoid unnecessary purchases for a set period. Look for fun apps designed for kids to track their savings and learn about money management. Celebrate milestones when they reach a savings goal. The positive association with saving will stick with them.
II. Investing: Making Your Money Grow (Act Like A Farmer!)
Once your child understands the concept of saving, and having money without the need to spend it, you can introduce the idea of investing. This may feel intimidating, but remember, you’re planting seeds, and teaching them the look at money like a farmer looks at a grain bin full of seeds. Without extreme emotions, but careful scrutiny regarding where the seeds will be planted for the best possible return.
- 4. Planting Money Seeds: Use the analogy of planting a seed. Explain that when you invest, you’re like planting money seeds. You give your money to a company or the government, and they use it to try and grow it bigger over time. It’s important to keep the explanation simple. No need for fancy terms like “portfolio” or “market volatility.” Focus on the core idea of growth in a safe way. For example, you might say, “Imagine buying a tiny piece of the company that makes your favorite video game. If the company does well, your tiny piece can grow bigger and be worth more money!”
- 5. Sharing is Caring (and Growing!): Explain that when you invest in a something, you’re buying a small piece of it, you become a part-owner. If the people who care for the thing you bought are smart and do well, your small piece can also grow! Relate it to things kids understand. For instance, “What would happen if you gave your friend money to grow their lemonade stand? If it became super popular, your share of the profits would grow!” This connects investing to a familiar and relatable experience.
III. The Magic of Compounding: The Snowball Effect
Without saving, we can never get to the good part. Without investing what we’ve saved, we can’t arrive at the real secret to having wealth: Compounding. Compounding is the real magic behind every fortune seen and unseen in public. It’s what makes your money grow faster than we could ever truly save, earn, steal, or borrow. This one thing separates those who have financial freedom, from those who are slaves to a job, no matter what they earn per year. That’s right, even successful, well-educated adults struggle to fully grasp this power.
- The Snowball Effect: Use the analogy of a snowball rolling downhill. It starts small but gets bigger and bigger as it collects more snow. Way more snow than we ever put into it. Compounding is similar. It’s exactly the same as what happens when we plant one kernel of corn. It yields more corn. Now, what happens when we re-plant all the new corn seeds? Then again? Then again! It’s money that creates money without our spending more effort.
- Illustrate with a Simple Example: A basic example: If you save $10 and earn 10% interest, you’ll have $11. The next year, you’ll earn 10% on $11, not just $10. It adds up quickly! A simple chart or graph can visually demonstrate how compounding makes money grow exponentially over time. Visuals are key for understanding this concept.
IV. Parent Tip: Lead by Example (and Learn Together!)
One of the most powerful ways to teach your children about financial literacy is to demonstrate good money habits yourself. Be open about your own financial goals and involve your children in age-appropriate discussions about budgeting and saving. Don’t be afraid to admit you don’t know everything. Use this as an opportunity to learn together.
V. Conclusion: Planting Seeds for a Bright Future
Teaching your children about saving and investing is one of the most valuable gifts you can give them. It empowers them to take control of their financial future and achieve their dreams. Remember, you don’t have to be a financial expert to get started. Focus on building a positive relationship with money, making learning fun, and leading by example. By planting these money seeds early, you’re setting your children up for a lifetime of financial well-being.