The Best Way To Set Your Children Up for Financial Success

According to recent surveys, half of US adults lack financial literacy. Unfortunately, such a vitally important skill is typically not taught in schools. And in the absolute majority of cases, parents are the ones responsible for passing the knowledge over to the younger generation.

An understanding of personal finance can have a great impact on the child’s life. If you manage to do a great job, your kid will grow up to be a financially independent, successful human being who understands what to pay attention to when making any money-related decisions.

However, teaching financial literacy is more than simply giving the children a list of rules. You would also want to make sure that your kid has the right financial mindset, and that, of course, will require some time and effort. Below, you will discover plenty of tips that will help you effectively teach your children how to build and maintain a financially stable future.

Key Takeaways

• Since financial literacy is often neglected in schools, it falls on parents to teach their children essential money management skills.
• Starting early with lessons on earning, budgeting, saving, and spending lays a strong foundation for financial independence in adulthood.
• Teaching financial literacy isn’t just about rules; it’s also about fostering a positive attitude towards money.
• Encourage your children to view money as a tool for achieving financial freedom rather than simply accumulating wealth. This mindset will empower them to make smart financial decisions throughout their lives.
• Beyond theoretical knowledge, giving children hands-on experience with money—whether through allowances, savings accounts, or even early investing—helps them internalize important financial concepts.
• Real-world practice is key to ensuring that they apply these lessons in meaningful ways as they grow.

5 Important Lessons To Teach Your Kid About Financial Success

Here are the five most important lessons to teach your children. You can consider these the non-negotiables.

1. How To Earn Money

Earning money and handling money is important to understand for your child's financial success. Let's review the concept based on age.

• Small children can earn money by receiving an allowance. In such a case, you would have to determine the allowance amount (one dollar per year of age per week can be used as a benchmark) and always be consistent, so that the child understands that he can count on the money to save and plan for the future.
  • Whether you decide to tie the allowance to chores or good grades is totally up to you. Some parents prefer to avoid rewarding kids for doing what they simply need to do as part of life, but such a system might work for certain families.
• Teenagers can start seeking a part-time job. This might be a great opportunity for you to teach your kid that you don’t necessarily get to keep all the money you earn. Talk to the teenager about taxes and the difference between net and gross pay.

2. Spend Money with Purpose

It is incredibly important for children to have their own money as only in such a way they will learn to make spending decisions.

Kids are typically impulse buyers. And while you should teach your youngster to distinguish between “wants” and “needs”, the little one should be able to purchase something fun every once in a while.

So, what you can do is introduce a one-day cooling-off period before making the purchase. You can also encourage the child to calculate how many hours he would have to work to be able to afford the item. If the urge to buy the special something doesn’t go away and there is no cheaper alternative available, the purchase might be worth it.

3. Create a Budget

Budgeting is, perhaps, the most essential skill every individual should pick up. And the sooner that happens, the better.

Whether your kid is already earning his money or is receiving an allowance, you should introduce the little one to the concept of budgeting. For example, the child might have three jars for saving, spending, and giving. With older kids, you can go the extra mile, and tell them more about your own budget and how much money is needed to cover utilities, groceries, and so on.

There are also plenty of cool budgeting apps for kids that you might want to check out:

• GoHenry
• Bankaroo
• Savings Spree, and many others

4. Save for the Future

Encourage your children to begin saving at least 10-15% of their earnings. It’s important to set up a savings goal, so make sure your kid understands what he’s saving for.

To make the process more fun, you can create a diagram that will help track the progress.

Teenagers can be introduced to the concept of an emergency fund. The money that they set aside might later on be used to fix a broken smartphone screen, for example.

5. Manage Debt

This is one of the additional topics to discuss when setting children up for financial success. As practically no one manages to avoid accumulating at least some debt, you would have to make sure that your child understands the basics of how it works (including all the risks of borrowing, of course), those are:

• Understand credit. If you use credit cards, tell your kid more about the process the next time you buy something. Children should understand that it’s, basically, an act of borrowing, and you would have to return the money. Also, make it clear that if you fail to return the money on time, you would have to face some penalties, and, as a result, spend even more. If your kid is old enough, this is the perfect opportunity to talk about interest.
• Explain how a credit card works. Children should understand how credit cards work before they can apply for one. Such cards can become amazing financial tools if an individual manages to use them wisely. So, tell your kid everything he needs to know about building credit and why having a good credit score is important. Teenagers might also like the concept of cashback and bonuses.
• Don’t spend more than you earn. It’s vitally important for kids to understand that borrowing is not necessarily a bad thing, as long as you know that you’ll be able to give the money back. That’s why no one should ever borrow more than they can return. Explain to your kids that their total debt payments shouldn’t exceed 36% of their income.

5 Things You Can Teach your Child Right Now 

If you are looking to make a difference right now, here are some relatively simple actions you can take no matter your child's age.

1. Open a Bank Account Now

Individuals can open their own bank accounts only once they reach the age of 18, but you have the right to open a custodial account which is the property of the child that is currently managed by an adult.

It is a great idea to open an account as soon as possible with a savings account being one of the best options. Some of those have no minimum balance requirements, no monthly maintenance fees, and offer a high APY.

The kid can contribute money from his earnings to the savings account, and you might decide to also save some cash that the child gets gifted.

2. See a Financial Advisor About College

You need to come up with a realistic plan of how you’re going to help your child get through college.

The earlier you start the financial planning journey, the better as you need to have at least a few years to adjust and strategize. An advisor will help you discover everything you need to know about scholarships and loan options so that your kid manages to make the most of the experience without breaking the bank.

3. Put Away a Little Every Month

You might want to contribute to your kid’s savings account as well. Even $5-$10 each month can make a huge difference in the long run. But whenever you can set aside a larger amount, you should do that.

Ideally, you would want to transfer the sum to the kid’s account as soon as you get your paycheck. You can even automate the payments so that you don’t have to actively think about ticking the task off your to-do list.

Ensure that your child’s savings account remains untouchable. This means that you should not deplete it, even if you are facing a financial emergency. 

4. Think About an Allowance System for Your Kids

The kid needs to understand that not all the money that he receives should go towards spending. Explain why a part of the sum should be set aside. You might even decide to create two separate funds – one for saving (the money will go straight into the savings account) and one for giving away (this can include gifts for friends and family or charity).

Such a system will help the children learn about how important it is to give. And by saving a certain part of their income, they will learn to manage their finances.

5. Create Opportunities for Work, Even at a Young Age

Children should understand that money should be earned.  How exactly you’re going to approach the topic would depend on how you personally want to raise your kids. For example, some like to tell their children that school is their ‘work’, while others choose to reward kids for extra chores.

6 Additional Lessons To Teach Your Kids About Money

Here are six more lessons to keep in mind to make your kids financially successful. 

1. Teach Your Kids the Difference Between Being Rich and Being Financially Free

You would want your kids to grow up having the right financial mindset. Becoming rich should not be their ultimate goal, they must strive to achieve financial freedom which means being fully in control of their finances.

This typically means:

• Saving your money in the right accounts
• Living within one’s means
• Keeping the tax bill low
• Being able to accumulate just enough wealth over time to live the life that one wants

2. Encourage Your Children in Their Own Financial Enterprises

Entrepreneurs have the potential to earn more than in a traditional job without having to work 9-to-5. By encouraging your children to start their own businesses, you’ll help them understand that it’s something very much achievable.

Here’s what you can do:

• Find out what your child is good at. Kids can have a natural affinity for technology, cooking, drawing… This passion can easily become the basis of their future business. Some might even start earning money before they become adults. This 2-year-old, for example, is selling his paintings for $7,000.

• Encourage creativity. Successful entrepreneurs share a lot in common, including creativity. Help your child learn to think outside of the box by exposing the kid to galleries and museums, allowing the child to explore his ideas, and so on.

• Introduce your kid to entrepreneurs. The stories of other people can inspire your child and show him that everything is possible. If you don’t have a successful businessperson in your social circle, you can always share the stories of popular entrepreneurs.

3. Teach Your Child How to Invest

Once your child grasps the essentials of budgeting and saving, introducing them to the world of investing can be a powerful next step in their financial education. Investing not only teaches them how to grow their money, but also helps them understand the balance between risk and reward—a crucial life skill. By investing, they’ll learn that taking calculated risks can lead to significant gains, but also that those risks must be managed wisely to avoid unnecessary losses.

Begin by explaining the fundamental concepts of investing, such as stocks, bonds, mutual funds, and the principle of compounding. Use real-world examples to illustrate how investments can grow over time, and discuss the importance of diversifying to spread risk across different assets. This will help them see how investing can be a strategic tool for building wealth over the long term, rather than a quick way to make money.

To make the lesson tangible, consider opening a custodial brokerage account for your child, which you can manage together. Many brokers offer these accounts, allowing minors to invest in stocks, ETFs, and other securities with parental guidance.

4. Don’t Let Them Borrow Money If They Don't Have To

While it’s always advisable to steer clear of borrowing when possible, it’s crucial to instill in your child a deep understanding of the responsibility that comes with borrowing money. The concept of borrowing can be a slippery slope, especially if not approached with caution and a clear repayment plan. Before your child ever considers taking out a loan or borrowing from friends or family, they should understand the potential consequences, such as interest accrual, the impact on their credit score, and the strain it can put on personal relationships.

Teach them the importance of evaluating whether borrowing is truly necessary. Can the purchase wait until they’ve saved enough? Are there alternative ways to obtain what they need without incurring debt? If borrowing becomes unavoidable, guide them through the process of borrowing wisely. 

5. Teach Them the Significance of Needs vs Wants

The main difference between needs and wants is the fact that you must financially take care of your needs before spending cash on anything else. Explaining the concept to a child who doesn’t need to pay rent or buy groceries can be challenging, but it’s not impossible.

For example, the next time you go grocery shopping, take your kid with you. Fill up the basket with different items and then ask the child to explain which ones are “needs” and which ones are “wants”.

6. Show Them How to Have a Positive Mindset Towards Money

The money mindset of children is typically based on how their parents talk about finances.

If you repeatedly say “You have to work hard to earn money” and “You have to get a job and work a lot to pay for your bills”, your kids might find it challenging to start their own businesses in the future as they would be subconsciously putting the brakes on every time they have a new idea. Instead, try to say something affirmative, such as: “The are plenty of money-making opportunities all around us.” 

The best way to set your children up for financial success is by helping them build a healthy attitude towards money. And though they might need quite a few years to learn about personal finance, the results would be worth it. 

Related: 9 Ways to Save Up Money for Your Kids

Note: The content provided in this article is for informational purposes only. Contact your financial advisor regarding your specific financial situation.