Teaching Kids about Money in 5 Stages: Don’t skip to #5

by Rob Bertman, CFA®, CFP® in Spending, Teaching Kids about Money
September 2, 2020
Teaching kids about money

Teaching kids about money in 5 Stages: Don’t skip to #5

None of us want our kids to feel entitled or grow up to be spoiled brats. Many of us also don’t want our kids to make the mistakes that we’ve made with money.  We want them to lead better lives and be financially responsible.

Teaching kids about money is a super-duper important, because money is front and center in many key life decisions our kids will make. where they go to college, what kind of car they buy, how much house can they afford, etc. 

It can even be a factor in the person they decide to marry. 

I’m going to show you the money lessons to teach your children in 5 stages. This is based upon the many books I’ve read on the subject as well as the real world experience of raising our two boys, Charlie (10 years old) & George (8 years old), while also trying to give them a financial education.

How to teach kids about money

When we talk about how to teach kids about money, parents often think that giving their kids an allowance is the first step to help them learn financial responsibility and develop financial literacy. According to a RoosterMoney survey, 69% of parents with kids between 4 and 14 years old are doing some form of allowance.

That is partially true, but many parents make a big mistake with allowance…paying kids for chores. 

don't pay for chores

That’s right, I said it. Paying for chores is a mistake if it’s put too early in the process, especially with young kids.

(Don’t get me wrong, kids do need to learn the importance of hard work and earning money.  But it shouldn’t come before teaching them other important money lessons. More on that later…)

Think about it: What gets most people into real trouble with money?  How they earn money or how they spend their money?

Spending and debt (the extension of spending too much) are the major sources of financial stress and what gets most people into financial trouble.

Therefore, spending is the #1 skill that people need to master to have financial success. 

Those who master spending are able to stay out of crippling debt, save for the future, and also avoid the top reason couples argue about money.

That’s why the most critical skill in personal finance and money management is spending responsibly, so parents should put some real focused attention on helping children learn this really important skill.

Not only does focusing on spending help the kids financially, but it also helps them in life. The skills kids develop as they learn how to spend responsibly also help them develop patience and independence along the way.

That’s what these 5 stages are all about. We want to take our kids through this progression of financial literacy surrounding spending, so definitely go in order. 

After going through these 5 stages, we’ll talk about how to assess where your kids are in their development. 

Stage 1: Things Cost Money

Have you ever walked through the toy section at Target or Walmart and your kid says, “I want that!”?

Who hasn’t, right?

Most young children don’t yet understand the concept of money, that we actually need to buy things or pay for them. This is totally age appropriate for any child under 6 or 7 years old.

They don’t know the difference between the things you have at home that you have already paid for vs things in a store that you haven’t bought.  They might also not understand the difference between food already in the pantry vs spending money to go out to dinner or order in.

In this step, we’re just introducing the fact that things cost money, that in order to own something, there needs to be an exchange of value.

Example #1: The toy section

I used to deliberately walk my kids through the toy section to get them used to this idea, and also plant the seed that just because they want something doesn’t mean they can get it. I would point to the price tag and say, “This costs $5 to buy”.

What do you say to them when they really want something in the store but you’re not going to buy it for them? This fits right in with Stage 1 too.

My go to is, “It’s not on the list so we’re not spending our money on that today.” At first, there was some push back, but I was expecting it. It took some trials, and I had to stay strong, but it quickly became a non- issue. Now when we go to the toy section, they totally get it.

Example #2:  Grocery shopping

When going food shopping, my daughter came with me and wanted to eat an apple as soon as we put it in the cart. I would often say something like, “We can’t eat that apple yet. It still belongs to the store until we go to the register and pay for it. Then it belongs to us and you can eat it.”

Again, just trying to get the point across that things cost money.

You can also do this with play money. My daughter has a play ice cream stand. When I order ice cream, I hand her the toy dollars and say, “Here’s the money for the ice cream. Thanks!”

The idea here is to lightly point it out in a benign way. We’re just planting the seed. It will stick over time. 

They don’t need to fully understand the concept of exchanging value, just that things cost money.

Stage 2: Money is Finite

Money is finite
Money, like time, is limited.

Now that they understand that things cost money, the next step is for them to understand that there’s only a limited amount, that it’s not endless.

This is where you start giving your kids allowance or “learning money” so they can begin to see the difference in the amount they receive vs the cost of the things they want.

Example: Your kid doesn’t have enough money to buy what they want

So let’s say that your kid has $5 and you take them to Walmart or Target to buy one of their friends a birthday present. They see a superhero or doll that they want to buy that costs $10. What will they notice?

Well, first of all they’ll notice that they don’t have enough money to buy it. Then of course, they’ll ask if you will give them the other $5 to buy it right now. What should your answer be?

“It looks like you don’t have enough money to buy that right now. I’m using my money to buy xyz today so I guess you’re not able to get that right now.”

Might a kid get, shall we say, “frustrated” in that moment?

Money is finite

It’s bound to happen, but we as parents need to stay strong in that moment. I promise you that each time you do this, it will get easier and easier. It will sink in.

Your child needs to understand that they only have a limited amount of money and it will only go so far. If you have $5, you can’t buy a $10 item. In the long run, it’s better for them to learn this lesson today while the stakes are extremely low.

This may seem like a simple concept, but it is extremely important for them to grasp, because it is related to using credit and going into debt.  

Debt allows us to overextend ourselves beyond the finite money we have in the bank. Kids who don’t learn this lesson while the stakes are low learn it under much more dire circumstances, when their credit is maxed out.

Stage 3: You have to make a choice.

make a choice with money

We’re starting to see the evolution here.  First, things cost money. Next, money is finite. The natural conclusion is that we have to make choices about where we spend our money.

Parents, be very careful here. 

Often we use the words, “We can’t afford that, ” but this is dangerous for kids to hear. 

Not only can it make them fearful about your family’s financial situation, but it also creates a limiting belief about money in their minds.

Replace the word “afford” with “choice”. In other words, instead of “We can’t afford that,” say, “We make a different choice with our money.”

Example #1: Your kid sees a nice car

Let’s say your kid sees an expensive car and says, “Can we buy that?” 

Your response could be, “It is a nice car, but we have to make a different choice with our money. If we choose to buy that car, we’d have to choose to live in a smaller house,” or maybe, “We’d have to choose not to have heat, air conditioning, or electricity.”

What you’re doing here is juxtaposing the cost of something new with the cost of what you have right now. It helps kids understand that you have chosen the things that matter more to you and your family.

Example #2: Choosing between toys

Here’s how it could work with a kid’s allowance.

Let’s say they’ve been saving up and have $20. They walk into the toy section and see 3 things they want. One costs $15, and the other 2 cost $9 and $7.

They have to make a choice here. Get the one $15 toy or the $9 & $7 toys. They can’t buy all 3.

Making choices helps the problem solve and also prioritize the items that are most important to them. If they can have it all, then they don’t really have to vet their priorities.

Stay out of your kid’s way

Parents, let them make their own choices!

Don’t get in their way no matter if it’s a fad or not. Even if you think they’re going to come home, open it up and be disappointed, let them make the choice. 

It’s much better for them to understand the consequences of their choice, because they gain a deeper understanding about what’s important to them and hone in the way they make their choices in the future.

Stage 4: Delayed Gratification – Teaching Kids Financial Responsibility

delayed gratification
Patience pays off

This is where a lot of parents miss the mark. How do we know? Because this is something a lot of us adults need to work on too.

Here’s the deal: If your kid wants something but they don’t have enough money to buy it… DO NOT bail them out by giving them extra money, even if they’re just a dollar short.

Kids need to understand that they can have it, but they can’t have it now. 

It helps them understand the concept of saving money for something they really want. Sometimes there’s time between when they realize there’s something they want and when they’re actually able to get it.

Let me tell you from experience that this really pays off.

Example #1: The Natural Shift from Spending to Saving Money

We set our kids up with “learning money” using the 3 common buckets (spend, save, and donate). At first they had to divy up the money evenly, but then we told them that they have to put at least $1 in each bucket and can decide what to do with the rest.

They can spend their spending money on anything at any time and can use their donate money to go to any cause at any time. Their save bucket is different though.

In order to use their money in savings, the item had to be written on their white board and stay there for at least a week before they could use it to buy that specific item even if they had more than enough in there. 

In kid terms, one week can seem like an eternity. That’s what delayed gratification is all about.

SIDEBAR: The allowance you give your kids has to be enough where they can actually buy something they want with it. Giving them a quarter a week won’t cut it. We give our kids $1 x their age each week.

My oldest son Charlie naturally put $1 in his savings and $1 in his donate. The rest went to the spend bucket.  Guess what happened…

He spent all of his spending money and his savings grew very slowly.

Well, he wanted to buy a game for his Nintendo Switch for $40, but he was very slow getting there.

Then, one week, I gave him his money and he said, “You know what dad? I’m only going to put $1 in my spend in the rest in save, because I keep spending my spend money, and I really want to save up faster for the Switch game.”

My jaw dropped. He got it! All on his own!!

He understood the trade off (or opportunity cost) of how the money he spent today affected his ability to save up for something he really wanted. He understood how saving and spending money was interrelated. 

4 weeks later, he had saved up to buy the game. He won!

Example #2: He didn’t really want it in the first place.

My other son George saw that one of his friends got a new scooter, so naturally he wanted one too. He actually had enough money in savings to buy it but it wasn’t written down.

He was so frustrated that he had to wait a whole week after writing it down to get it even though he had the money.

Well, as the week went on, he talked about the scooter less and less. Once the 7 days passed and he was able to buy it, he had a different tune. “Dad, I don’t really want the scooter afterall so I’m going to cross it off my list.”

The lesson was all about delayed gratification, but in this case, it led to him understanding that it wasn’t important enough to him. Waiting gave him time to reflect on it and realize it’s not something he wanted to spend his money on at all.

Alright, well now your kid knows about money, that it’s finite, choices have to be made, and that sometimes you have to wait and save up for what you want.

Next stage…

Stage 5: Money comes from work (that adds value to others).

Money comes form work

Most people put this way too early in the game by paying for chores, and it can actually be detrimental to the way your kid feels about money (and their chores for that matter).

Three reasons to avoid paying for chores

First of all, we want to foster intrinsic motivation (a sense of a job well-done) and being a part of the family team by doing jobs around the house. 

Chores are meant to teach your kids how to take care of themselves and be self-sufficient. Doing chores leads to self-confidence, lower anxiety, empathy, self-regulation, and more.

When we overlay the extrinsic reward of money, the completion of the task gets related to a financial incentive rather than that’s what is expected of you as a member of the family. Your kids will start to negotiate with you to do what you ask of them.

“Will you clear the table tonight?” The response, “How much will you pay me to do it?”

Secondly, every kid is different. There are those kids who don’t really care about money or about “stuff”. If you ask them to clean their room or else they won’t get $2, they don’t care. Now what? 

“Do it anyway, because I said so.” (Talk about your ultimate backfires.)

Finally, without a kid understanding the 4 stages above, they’re left without understanding the empowerment of earning their own money and what it can do for them. Plus, if there’s nothing they want at the moment, then what’s the point of doing the chore.

It is important that they understand that money comes from work, but not until they understand the first 4 stages first.  Also, it’s not just about working, it’s about finding work that adds value to others.

Let’s face it, there are plenty of jobs out there that our kids can clock in and out of if they want. But if they truly want to earn more to get the things they want or have a secure financial future faster, they have to put in more valuable work. 

Valuable work is the way for them to ramp up how quickly they can buy things and save for larger purchases like a car, college, etc.

When do I introduce to my kids that money comes from work that adds value to others?

The best time to start this is when your kids start expressing interest in more expensive items that would take them about 3-6+ months to buy just on their allowance alone.

I like my kids earning money by doing something valuable for people outside the family first. For example, start by mowing our lawn first, get good at it, then approach neighbors to do theirs for a fee. 

This is an extremely important skill for your kids to learn if they want to perform well at a job or starting their own business. Wait until they get the concept of money first.

How do I start teaching my kids about money?

How do i start teaching my kids about money?

The first step is to start the conversation about money and see where they’re at. 

Do they understand that things cost money? 

Do they understand that money is finite? 

Do they understand that they have to make a choice with money? 

Do they understand delayed gratification with money? 

Do they understand that money comes from work that adds value to others?

Wherever they are, backtrack by two stages to make sure they fully grasp it. 

If you’re going to introduce allowance, it needs to be met with the understanding (and commitment from you) that they will now be buying their discretionary items and that you won’t be bailing them out.

Give them enough money that they can get some small things right away, but the more expensive items would need at least 4-6 weeks to save up for it.

The second thing you can do is to start relaying your money values to them. 

It’s not for me to tell you how you should raise your kids or how you should be spending your money. It’s your money and you should pass on what you feel is appropriate.

These stages will help you start that conversation and start thinking about how you want your kids to handle money as they get older.

Take your time. Do things that are age appropriate. You know your kids better than anyone.

Finally, don’t get too far ahead and teach your child more advanced financial concepts until these spending habits are nailed down. 

Some parents jump into a savings account, talking about budgeting, investing and earning compound interest, credit and debt. That’s all well and good, but it can come later.

These 5 stages are the groundwork for all of that other stuff. Start here.

Financial literacy for kids starts with our example

financial literacy for kids - parents example

Look, ultimately our kids are watching us. 

If you are committed to your kids becoming successful with money, it’s all about living what you’re teaching.

Try it on for yourself. If they’re old enough, let them know you’re on this journey with them. That you’re trying to get better with money and teach them the skills to be financially independent.

If you’re getting non-essential Amazon packages delivered multiple times a week, they’ll notice.

If their devices, clothes, vehicles are nicer than your friends’ stuff, they’ll notice.

If you keep talking about the things you want but can’t afford in life, they’ll notice.

If you bail your kids out financially so there aren’t any real consequences, they’ll notice.

If you are stressed about your financial situation because you’ve overspent and don’t know what to do, they’ll notice.

Kids are seeing the example we’re setting for them no matter what we teach them. They are seeing the choices we make with our money and our actions are rubbing off on them.

If you feel like you want to get your financial house in order to set a better example for your kids, I’m here to help.

Let’s talk through your challenges together.

If you don’t want to talk but you want to reach out, email me at rob @

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