5 Things to Teach Your Kids About Money and Happiness

To be happy and independent, kids need to know a thing or two about money. Here are five suggestions for helpful money lessons that parents should share with their children as they grow up.

A mother gives her smiling daughter a bath.
(Image credit: Getty Images)

What are the most important lessons you can teach your children about money? That is a difficult question, because there are so many teachings children learn from their parents, grandparents or guardians. One thing is very true, though: How we act later in life often can be directly correlated with what we learned earlier in our youth.

Children get lessons on right and wrong. They can develop a hard work ethic at an early age. They can even excel in math. Too often, however, adults can get themselves in trouble because they did not develop a sense of what to do when it comes to financial matters.

Here are a handful of things that I believe are important to teach the young ones you love.

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1. The value of money

We probably all heard the line “Money doesn’t grow on trees” over and over when we grew up. But what does that saying mean to the kid who looks outside and sees that money doesn’t grow on trees? Kids need to learn so much more, like:

  • Where does money come from?
  • What does it represent?
  • How do you get it?
  • What can it buy?

Have a conversation with a daughter, son or grandchild. Play the game “How much do you think this costs?” in the grocery store. Explain why one item might be more expensive than others.

Help them understand the basics of supply and demand. For example, the more people want something (i.e., high demand), the more stores can charge for it. Or if an item is hard to find (i.e., scarce supply), the store can also charge more for it. Give inverse examples too.

Even a lesson about day-old bread can help children understand the value of the bread (and money). Ask, “Would you want bread that just came out of the oven or bread that has been in the store for a week?” Then ask, “How much more would you pay for the newer bread?”

For kids a little older, take them to a dollar store and explain why it is now the $1.25 store. Help them understand the concept of inflation and that a dollar today isn’t going to be worth as much as a dollar when they are all grown up. That will lead to a topic about investing. (We’ll save those tips for another article.)

2. Living within a budget

As a financial planner, one of the saddest things I see is when people, even with wealth, cannot live within their means. Overspending often leads to stress and anxiety. It can ruin credit ratings, lead to high interest rates on money owed and even lead to bankruptcy.

What might be even worse, overspending can lead to relationships ending for couples. The leading causes of divorce in the United States are usually incompatibility, infidelity and money issues. With the divorce rate so high, many married couples should have a marriage counselor to work through problems before they get too large to overcome. They should also have a financial planner to help talk through those money issues couples face and routinely struggle with.

So, before children get themselves in trouble later in life, take time to talk to them about spending when they are in elementary school. For example, take them to a penny candy store and give them a dollar and say, “You can only buy a dollar’s worth of candy.” When they get older, take them to the grocery store and give them $100 to buy groceries, but again, they can’t go over what they have. Later, in the teenage years, help them understand what a budget is and how to live within it.

Before completely moving out on their own, let kids know what happens when one spends too much on credit cards. Show them how the debt builds up and interest compounds. Explain what a credit score is and how those scores can impact them later in life when they want to buy a car or a house.

3. Spending does not always bring happiness

Ask a kid, “Does eating chocolate cake make you happy?” Likely the answer is “yes.” (If no, pick another dessert.) Then get them to understand that happiness from eating that one thing doesn’t last forever. It is the concept of “fleeting happiness” that you want them to grasp.

Then ask them, “To stay happy, do you need to eat cake every time that initial happiness wears off?” Hopefully they are old enough to understand that eating cake 24 hours a day seven days a week is a bad thing, as it might cause someone to become very unhealthy. If they understand that being obese can create many health issues and good health is important to happiness, they might start to understand what true happiness is (or at least short- versus long-term happiness).

Now take that lesson and apply it to shopping. Explain that there is a short-term happiness people receive when buying the things they want. Most times that happiness fades. Help them understand, just like eating too much cake can lead to bad things, buying too many products (and services) can also led to unhappiness.

4. Lessons on saving (at the store and in the bank)

Before sixth grade, help a child understand the concept of brand names. While yes, quality might be better with certain companies, sometimes items are identical, but the brand name costs more. Give an example of a T-shirt: A shirt without a logo on it might cost $10, but the same shirt with a logo on it might cost $25. Help kids understand they are paying extra and let them make up their mind if that is worth it. Without confusing them, it does also help them to know that buying the cheapest item is not always the best decision, especially if it is an inferior product or service.

As kids become teenagers, help them understand that some happiness comes from knowing there is enough money to buy the things that are needed. That doesn’t always mean you have enough to buy the things you want. There is a big difference in the words “need” and “want.” If they can get the lesson of “buy what you need, but don’t always buy what you want,” they will likely save more. Help them understand happiness then comes from having some savings, because it leads to “peace of mind.”

As the kids are about to move out on their own, let them know they are making decisions now that impact themselves when they are older. If they do not save for retirement, they are likely cheating themselves out of some happiness they deserve later in life.

5. Discuss giving – and demonstrate it

Spending money does not always have to be self-centered. For example, donating to support a charity can bring happiness, even though that money is going to help other people.

At an early age, this concept is hard to grasp. When you bring up giving, you might get a response, “It is my money. I don’t want to give it away.” That is a completely normal reaction.

So how can one teach a lesson about giving? A dollar donated in a Salvation Army bucket during the holidays might lead to a smile, a “thank you” and an extra ring of the bell, but this lesson needs more. A child really understands it when he or she sees the person benefiting from the donation. For example, make a donation to a soup kitchen, but also volunteer so the child can see the money goes to help feed those that are struggling to have enough food to eat. They might see another kid their age and likely get a “warm fuzzy” feeling from helping someone in need.

I could go on and on with lessons for kids, but I will stop at five. I hope these examples serve as a reminder of how much you can positively influence your children now, so that they may be happier later in life.

Have other good tips for children to learn about money? Please email me at bshapiro@hms-financial.com. I’d love to read them.

Securities and Advisory Services offered through Cadaret, Grant & Co., a Registered Investment Adviser and Member FINRA/SIPC. HMS Financial Group and Cadaret, Grant & Co. are separate entities.

Securities and Advisory Services offered through Cadaret, Grant & Co., Inc., a Registered Investment Adviser and Member FINRA/SIPC. HMS Financial Group and Cadaret, Grant & Co., Inc. are separate entities.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Barbara Shapiro, CFP®, CDFA®, CeFT
President, HMS Financial Group

Barbara Shapiro is the President of HMS Financial Group located in Dedham, Mass. She is a CFP®, Certified Divorce Financial Analyst and a Financial Transitionist®. She is also co-author of "He Said: She Said: A Practical Guide to Finance and Money During Divorce." Her firm specializes in comprehensive financial planning with a subspecialty in divorce that assists clients' transition from marriage to independence with peace of mind and confidence. Learn more at HMS-Financial.com (opens in new tab).