What to teach your children about money, before they are 10

The other day when talking with Little Miss 5 about the cost of having her birthday party at the local gold class cinema, she casually gave me some financial advice to, "just go to the money machine in the wall and get the money".

I realised it was time to begin to explain where money comes from, after all, it's up to the adults in the lives of children to model helpful behaviours as our children begin their journey of understanding money.

Jump Ahead

By now as parents, we're probably already suffering from many of the mistakes we've already made and lessons we've missed about money basics, so it's time we were more deliberate about teaching our children about money matters.

After all, all good parents want a better life for their children and we're all a role model for somebody¹.

When children turn 2 years old

While the idea of money is really an abstract idea about the promised value underwritten by a government represented by a coin or a note (see I told you it was abstract), your typical two-year-old would probably just want to drop the shiny coin through a drain grate in the bathroom floor, rather than stockpile them for a later trip to the shops.

• Remember never let small children be unsupervised with small coins and other choke hazards.
• A young child will usually choose a coin based upon its bigger size and at age two, they can begin to recognise the different names and colours of the coins and will probably be asking why that is.

In a coin matching game, making pencil rubbings of the coins textured designs and tracing around their different sizes, you could encourage your child to match the coin name with its different size and colour.

When your child is 3

Some three-year-olds can begin to recognise different coins by their colour and size if they're had enough exposure to them.

• The more a child witnesses cash transactions with a parent at a shop, the more they grasp that coins have value.

Give Master 3 a gold one dollar coin and he might understand he can buy a treat by exchanging it, but will probably give the cashier a questioning look when the coin is not given back to him after the purchase.

When your child is 4

This age is usually when the trading aspect of swapping coins for treats becomes more understood (and the idea that a gold coin, even though it's smaller than a silver 20 cent piece can be swapped for more).

Most preschoolers would probably like to play imaginary restaurant at home rather than go out for dinner.

• So if you have a play restaurant meal at home, (with appropriately folded napkins and pretend printed menu), remember to remind them to pay the waiter the bill for the meal.
• Once they grasp this exchange concept, they'll usually become excited about being able to pay an imaginary bill with imaginary money. (Come to think of it I'd probably get excited about that too, but for different economic reasons).

Master 4 is now beginning to grasp the idea money comes from having a job and is swapped for work done.

He may also begin to understand that some people have less money than others and those with more can help those with less.

Master 5

Now Master 5 can proudly show you his age by holding up a single outstretched hand, it doesn't take long for a slightly more realistic understanding of money to begin to develop.

Now’s the time when many parents begin the awkward conversation about the pros and cons of pocket money, its amounts and motivations.

They have to weigh up the 'come and ask your parents for whatever you want' approach with, 'come and ask for what you need and use your allowance to buy what you want' approach (or it's many variants).

We all need to learn how to navigate through life as individuals and not dependants; and this is true for our children too. The best way to teach kids to start managing money is to give them some.

If they blow all their pocket money on an impulse purchase of the new Lego Superhero figurine and don't have enough left at the end of the week for what they really want, it's a good thing – they've learned first hand the consequences of overspending.

My experience is don't expect this key life lesson to be learned overnight; many of us are still trying to find a loophole in this difficult life lesson ourselves, so be patient - perhaps it's more an awareness to cultivate than a black and white method to master.

• Your 5-year-old is still very focused on the present, so the fun of dropping a physical coin into a physical piggy bank may be your best bet when modelling that money coins have some form of value and therefore should be kept safe.

A note on kids pocket money

I think there's value in deliberately distinguishing between daily chores and responsibilities around the home, from those more discretionary actions like washing the car sweeping the path or cleaning the windows.

• If we take the easy way out and only teach ‘every job must have a dollar payment attached’, we risk creating a mindset where limiting entitlement attitudes like, 'what are you going to pay me for it?' will quickly set them up for crippling failure and unhappiness.

Self-esteem and success in relationships are built on the sense that as an individual, we can make a difference and our contribution is valued beyond just money.

Allowing a passive and entitled attitude towards money to take hold in our children, will only handicap them in the real world.

Master 6

As soon as your child is receiving an allowance, they'll need somewhere to put it. As their understanding of value increases, the idea of saving up for something becomes less abstract and a little easier to grasp.

• A family afternoon of the kid's board game Monopoly or the chance to extract a gold coin donation out of Grandma (for the piggybank of course) will help build upon this concept of a future separate from today.

During first class school many children start learning to count by x2 and x10 and what is a want and what is a need becomes increasingly clearer to them.

Master 7

Learning we have the power of choice is a wonder for a child, and sometimes a less than wonderful time for their parent.

Parents in this part of life can be overheard to say with increasing levels of frustration, 'just make up your mind...’, or the more exacerbated version usually reserved for a grocery store line, 'just choose one....!'

• Mr 7 has reached the age where when given a choice of coins, it's the gold ones that get chosen and used first and when faced with the suggestion of ‘put some in the piggy bank...’ that's reserved for the small low-value silver denominations, never the gold coins.

This same power of choice when combined with the newly discovered ‘parent pester power’ will signal a level of self-awareness (often of supervillain capacity) that your child is ready for the next step.

Miss 8

By now the growing awareness of the numerical times table and basic adding and growing subtracting skills means you can no longer get away with a small denomination of a super shiny coin as a gift.

• Anything less than gold dollar coins, are met with the eye roll and disdain as the realisation of the value of a coin has sadly begun to take hold.

The good news is that Miss 8 has begun to learn about delayed gratification (I won't go so far as to suggest patience though).

If your child has been exposed to the every bit counts approach and the monthly emptying of the piggy bank negotiating their newfound ability to purchase a bigger treat, the value of savings will start to make sense. If you can wait a little longer, you may get a bigger result.

At this point in time, the poison of instant credit and the cult of 'I want it now', needs to be resisted.

Miss 9

At this age playing shop and exchanging play items for fake money should be on the fun things to do radar.

The problem is today's kids play shop toys have introduced play credit cards.

• This undermines the intention of teaching exchanging earned money for goods and tries to skip past this important lesson by using a ‘cashless no consequences’ approach, the cause of so many real-life problems today.

In the reach of realism in play, don't miss the important step of learning, there is a cost to purchasing and it's linked to your ability to pay.

Three skills to make teaching your children about money easier

Slow down the learning process

• Sometimes you may need to slow down the process and deliberately use cash when you're with your kids, so they see the transaction and can begin to normalise the importance of exchange and value.
• When paying for an item with your child watching, asked the shop assistant to include some coin in your change so that young watchful eyes can hold a coin and be part of the real-life learning experience.

Ask a helpful question

• When deliberately talking about money manners with your partner and your kids, don't just ask ‘how much did that cost?’, but rather ask ‘how long did you have to work to afford that?’

Understand the trick in play

• Our cashless fast credit society wants to teach our kids, "you can afford it, if you can afford the repayment".
• In fact, this distraction trick is taught as a popular sales misdirection in many sales environments. It's designed to take a person's mind off the real cost - and the interest rate - and onto the immediate benefit and not the end cost.

If we don't start to deliberately teach your kids about money before they reach 10, the advertisers will; and you might not like what they want to teach.

¹Social learning theory asserts that people learn social behaviour through observation and modelling of parents, peers and primary socialising agents. Children seek socials acceptance by behaving in accord with the direct and indirect messages and behaviours of their parents. These powerful and often unconscious money scripts can continue throughout our lives subconsciously.

Drew Browne is a specialty Financial Risk Advisor working with Small Business Owners & their Families, Dual Income Professional Couples, and diverse families. He's an award-winning writer, speaker, financial adviser and business strategy mentor. His business Sapience Financial Group is committed to using business solutions for good in the community. In 2015 he was certified as a B Corp., and in 2017 was recognised in the inaugural Australian National Businesses of Tomorrow Awards. Today he advises Small Business Owners and their families, on how to protect themselves, from their businesses.  He writes for successful Small Business Owners and Industry publications. You can read his Modern Small Business Leadership Blog here. You can connect with him on LinkedIn.  Any information provided is general advice only and we have not considered your personal circumstances. Before making any decision on the basis of this advice you should consider if the advice is appropriate for you based on your particular circumstance.