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By Michelle Huffman
Teaching kids about money is much more complex than asking kids to stash some coins away in a piggy bank. Of course you want to teach kids to save money, but you also want to teach them about the value of money through hard work, opportunity cost and budgeting.
Financial experts offer myriad ways to teach a child about money and which methods are best, but there are some common themes among them.
The first and most important piece of advice: Set the example. By making sure your financial house is in order and that you model good saving and spending behavior, your children have a good role model. Also, remember to talk about the financial things you do, like paying the check at a restaurant and paying bills online. Exposure to financial concepts helps children develop comfort around them, advancing their money smarts even at a very young age.
For young children, abstract concepts like money and time are difficult. You’re asking them to keep a specific piece of paper or metal disc for some amount of time so they can get a thing they want. Try to use a single denomination like $1 bills instead of a mix (since they all look the same to a child) and make sure they can see their dollars accumulate in a clear container, financial expert and author Dave Ramsey advises.
When they are old enough to recognize numbers, use everyday examples to reinforce the value of money. Give your child a few dollars when entering the grocery store and tell them they can use the money to purchase something they want. As you go through the store and your child considers items, show them how much they cost (these grapes are $3, do you have enough?) and let them think about how they want to use their limited money (if you buy grapes, you cannot buy cereal).
So much of how we use and think about money requires basic skills like creating and executing a plan. These cross-functional skills apply far beyond finances, and money is a great way to learn them. Let’s say your child wants an item that costs a significant chunk of change (at least to them) that requires saving. That’s their goal, now help your child develop a plan.
Open a kids’ savings account with a high interest rate and encourage them to deposit their allowance there. An account with a savings ATM card allows them deposit at most ATMs — a fun added bonus for the little ones — and you can show your children how their money is growing with each deposit. Offer to match their savings, dollar-for-dollar, as an added motivational bonus, and use this as another opportunity to explain how the bank helps their money grow through interest.
One thing the pros seem to generally agree on: Children should not receive money without working for it. A weekly allowance that isn’t attached to specific work teaches children little about the real-world value of money, Ramsey says. A weekly allowance that rewards children for completing set chores is better and functions a lot more like a job.
Money is really all math, right? It may seem overly simple, but research suggests that children who take more math classes are better off financially than those that take specified financial literacy courses.
Shawn Cole, professor of finance at Harvard Business School, suggested to the Wall Street Journal that this was the reason: “Without strong math skills, he says, people tend to use more emotional ways to invest, spend or save their money. What’s more, people with less math experience make worse financial mistakes with issues like compounding or underestimating how quickly interest accumulates.”
Reinforcing math concepts, using money or not, lays the foundation for understanding more complex financial topics later in life. So keep growing those math skills, setting a good example and talking with your children about money all the time.
Once your child becomes a teen, they'll already have a great foundation by utilizing these tips. Your next steps may be to teach your teen about checking accounts and credit cards.