Back to School Financial Education: Five Basic Financial Ethics to Teach Children

Truth, responsibility, respect, compassion and fairness tend to be the global understanding of the values we associate with ethics. But what about financial ethics? How do we teach our children to be ethically responsible with money?

Research shows that the best way to teach children morals and ethics is through example. From an early age, children observe their parents spending, saving and discussing money. They pick up on their parents’ views regarding money just by watching them.  

According to the 2015 Junior Achievement Teens and Personal Finance Survey, “84% of teens report looking to their parents for information on how to manage money,” but 34% of parents say their family’s approach to financial matters is to not discuss finances with their children and “let kids be kids.”

Kids need to develop solid financial ethics and skills from an early age so they will be well-prepared for adulthood. Providing children with the basics on how to budget, spend and save will provide them a lifetime of strong financial ethics and habits.

Teach Financial Ethics Every Day

Parents can use everyday actions to teach financial awareness and ethics to their children. Here are five tips that you can begin using to teach your children today.

• Diverse Spending - At an early age when children are learning about money, teach them to divide their money into four separate jars: Spend, Save, Donate and Invest. Splitting their money between the various jars not just reinforces basic math skills, but it also encourages responsible spending.
  • Spend Jar - This jar contains money that can be spent at any time by your child.
  • Save Jar - Money being saved for longer-term bigger purchases (a video game system, bike, etc.) is kept in this jar.
  • Donate Jar - Introduce your child to different charitable organizations and let them learn about the causes they support. Allow them to contribute their personal donations to a cause they connect with.
  • Invest Jar - Money in this jar can be put towards a 529 college savings account or towards a retirement fund. (Be sure to use age-appropriate language when explaining these investments.) If a child is working and earning money, they may be able to invest in a Roth IRA.
• Earned Spending - Instead of giving money indiscriminately to your child, teach them how to earn it. Make a list of chores they can help with around the house in exchange for an allowance, or let them try out their business skills by mowing lawns or pet sitting.  Teaching kids about the effort it takes to earn money helps them to appreciate and understand its value.
• Smart Spending - Teach kids how to spend intelligently so they can make the most of their money. Take them grocery shopping with you and compare prices. Show them how the smaller, cheaper box of cereal may be less cost effective than the larger box. Let them help you clip coupons or search for online discounts at their favorite stores. Involving your child in everyday tasks can help to teach them this important money lesson.
• Decisive Spending –To make smart decisions with money, kids need to understand the importance between items they want and items they need. Next time your child asks to buy something, have a discussion with them about whether they really need it or if they are being impulsive. If it’s a larger purchase, are they willing to invest the time needed to save for it? Are they willing to learn the value of buying things that are discounted or on sale? This approach not only reinforces making good short term financial decision on purchases, but it also teaches them about delayed gratification.
• Borrowed Spending - This is a topic some parents like to stay away from in hopes their children never fall prey to creditors. However, teaching your child the pros and cons of borrowing money will help them become more aware and responsible later in life. Offer to give your child a loan for a large item they want (cell phone, bike, computer, etc.) if they are able to save half of the cost on their own. Explain to them about loan payments, payment schedules and interest rates. The most important piece is to follow through on collecting their payments. It may feel uncomfortable for you to accept money from your child, but they will be much less likely to fall into debt as a young adult.

Teaching your kids about money and ethics while they’re young will help ensure they become financially responsible adults.

Questions about how best to handle your child’s finances? Your financial advisor can help you determine the right saving and investment opportunities for their future.

Wood Smith Advisors, a woman-owned Registered Investment Advisor (RIA), is a fee-only financial services firm that partners with its clients to simplify their financial lives. We focus on women, entrepreneurs and individuals with complex financial situations, providing objective and competent advice, education and services to help them develop and build their businesses and reach their financial goals. We can be reached by clicking here.

"Finance Made Simple" blog posts are intended for educational purposes and not for specific advice. Each person’s situation is different. Consult your financial advisor for advice relating to topics discussed.