Money lessons to teach your kids

Teaching money sense can’t wait until your child is grown up enough to understand every aspect of it. We asked Frank Magwegwe, CFP and Head of Momentum personal adviser services, a few questions about teaching children about money.

At what age do you recommend that parents start teaching their children good money habits?
As early as about 4 years of age. This is supported by great research by Dr Whitebread and Dr Bingham of Cambridge University in their paper, “Habit Formation and Learning in Young Children �? that revealed the following:

  • By three to four years, children know what money is for within a shopping context and can explain that it is used to buy things.
  • By four to five years, children understand that they need to pay for merchandise, but may not understand that coins have different values;
  • By five to six years of age, children understand that some denominations do not carry enough value to buy some items.
  • By seven years of age children begin to understand money can be exchanged for goods and that ‘change’ is returned by the shopkeeper only when denominations larger than the cost of the item are offered by the purchaser. 

How should parents go about teaching their children good money habits? Do you have any practical examples or advice?

  • First just talking about money with children goes a long way. I am surprised by the number of parents I talk to and to them the topic of money is off bounds with their children.
  • Discuss household income and expenses with the depth of the discussion taking age into account. That is, where do parents or guardians get money from and how do they use it. Take monthly income and expenses for the household and explain what the income is spent on. This introduces concepts of paying rent or mortgage loan, transport, food, school fees, etc. Discuss what is left after paying for expenses and what happens to it. This introduces the concept of budgeting and saving.
  • Go grocery shopping with the children and show them how much regular items used in the house costs. Use this opportunity to explain your shopping habits. Explain prices of branded vs. no name products, prices per size of packaging and prices of staple items like rice, bread, and milk.
  • When shopping for clothes set a budget and allow them to choose item of clothing. This allows for the opportunity to discuss prices of various clothing items depending on the brand.
  • Give them pocket money or an allowance and use a principle such as the 3S’ – save spend and share to discuss how they use their money
  • Discuss companies you frequently use like retail chains and if they are listed use that to explain the world of share investing. By us as a family shopping at this listed retailer, we contribute to the retailer’s sales and profits and this benefit our holding of the retailer’s shares.

Is there any age-related money advice, or can parents introduce good money habits from a very young age?
I think the research quoted in the first question gives a great framework. Start early with age appropriate concepts. For example:

  • 3 to 4 years – discuss what is money for
  • 4 to 5 years – expose children to paying for goods and services
  • 5 to 6 years – discuss the different denominations of money
  • 7 years – discuss costs of specific goods and services and how you pay for them and where do you get the money. What happens if you don’t have enough money?

While a credit card is useful to have, how can a parent explain the negatives to owning one of these to their children?

Start by explaining the concept of credit. That is sometimes one doesn’t have enough money to pay what they want to buy.

  • Then discuss the type of goods and services to buy on credit like a car and house
  • Discuss what not to buy on credit like food and clothing.
  • Finally link above to a credit card allowing people to buy goods and services on credit but they must be careful on what they are buying and if it’s groceries and clothing, they must pay back the money in full at end of each month.
While leading by example is the most important factor when it comes to finances and children, what can a parent do in order to help their children become better with money than they have been in the past?

  • Explain your money mistakes to your children and the impact they have had on the family. I often share how I my bought my first car - a brand new one that I couldn’t really afford. Explain that you don’t want them to make the same mistakes since you have already paid the “school fees.�?
  • Discuss thinking behind purchasing decisions, always making clear the choices and hand. For example, my daughter was asked why I drive “this old car.�? Why don’t you buy a Porsche like so and so’s dad or why don’t you buy a big house. These are fantastic teachable moments to explain the choices the parents have made. In my case the price of a Porsche, the monthly instalment, insurance and costs of maintaining it was discussed and I explained that by driving my “old car�? that I have paid off, I save money and invest it for her education at a great university.

Do you think it a wise decision for parents, or parents-to-be, to open up an investment/savings account for their child?

Absolutely! For parents to be, right from the beginning to benefit from the power of compound interest by investing for a very long term.

For older children, an account, whether bank or savings in their name provides teachable moments as they grow up. I use my 14 year-old-daughter’s unit trust account to explain the world of investing practically to her through discuss actual share holdings, investment returns and investment fees.

How can one explain the concept of investing to older children in order for them to understand the positive benefits of this?

Investing and saving although sometimes used interchangeably are not the same thing. Saving is about deferring consumption, preserving capital and liquidity whilst investing is about growing the capital through exposure to different growth assets like shares. So, children need to learn about saving first.

A great way to achieve this is use teachable moments. For example, you child has R100 and they want to buy something that costs R300. Discuss with them that by not spending R50 per month for 4 months, they will have enough money for the purchase. In one go, the child learns about saving as not spending, patience instead of immediate gratification by saving over 4 months and not using credit.

Once the child has mastered the concept of saving, you can move on to investing. That is, now that you have saved an amount of money and you don’t need to use it in the immediate future, you need to invest it. Start with example of interest from the bank. By keeping your money in the bank account, the bank gives you a small amount of money called interest for not using your money. However since you can draw your money from your account anytime the interest is small. If we however buy shares and keep them for a long time the “interest�? is much higher and in called an investment return. Use examples of day-to-day listed companies (retailers, banks, etc.) whose goods you consume to explain what shares are.

Do you think pocket money is a good idea, or should children rather be earning their own money from an after-school job?
A Google search of “the great pocket money debate�? shows 2 110 000 hits! The two extremes are don’t give pocket money, rather give chores that earn kids money and give pocket without linking it to chores. Frankly speaking there is not right answer; it is a matter of parents finding what works for them between these two extremes. The important thing is the discussions about money, saving and investing that take place with the children as they get their money as pocket money or for doing chores. Personally, I give pocket money and for additional money, my kids can do chores that pay an agreed upon amount of money.

If you could travel back in time, what financial advice would you give young Frank?

At about 12 when I had a firm grasp of the concept of money with pocket money as my income, I would give this advice: “Do not spend more than you earn and always save for future things you may want to buy.�?

You might want to read these guidelines on pocket money.

*This article originally appeared in

 What financial advice would you share with your younger self? Tell us in the comment section below.