For some children, money skills seem to come naturally, but it does not happen often. In fact, the JumpStart Coalition for Personal Financial Literacy found that only 10% of 12th graders could satisfactorily answer questions about personal finance. To raise financially literate children, there is no substitute for good, old-fashioned parenting and hands-on teaching.

Preschoolers: Starting Early Helps
Begin teaching your children early. Children—sometimes as young as age three—may begin to express curiosity regarding money. Keep things simple and do not expect too much. Take advantage of “teachable moments” that happen during the typical day, such as letting the child put coins into a parking meter or vending machine. You can begin talking to young children about the value of setting aside money they receive during the holidays or for a birthday for future wants and needs. Piggy banks make great gifts for this age group. As a child’s savings grow, you can decide together when to spend money.

In today’s consumer society, children are bombarded with advertising targeted at them. They need to understand that it takes hard-earned money to buy the latest toy or game, and that the family has a limited amount to spend. Explain that advertising is a sales pitch, and children do not need everything they see on TV. Begin to define the boundaries between what we want and what we need.

School-Age Children: Three Jars Approach
The elementary school years are a good time to help children understand how far a dollar goes. At about age seven, children can probably handle a small allowance. But instead of giving your child his or her allowance to spend as he or she sees fit, introduce the concept of three jars: a spending jar, a savings jar, and a giving-to-charity jar. Have the child divide his or her allowance into the three jars. To help encourage larger allocations to the charity jar, offer to match the child’s money with your own.

Spending jar
The spending jar can motivate kids to become wise shoppers. Talk to them about ways to compare quality and prices of similar items. A trip to the grocery store can easily lead to one of those teachable moments. You can show children the differences among generic and name brands and the variations among price and quality.

As children mature, let them have increasing freedom regarding how they use the contents of their “spending” jar. For example, as their interest in clothes blossoms, point out why one purchase may be better than another in regard to quality, appropriateness, and price.

Savings jar
This is also the time to begin focusing on the “savings” jar. As the value of the savings jar increases, consider opening a savings account at a nearby bank.

Together, decide on something the child wants to save for, such as a bicycle, doll, baseball glove, or video game. If an item costs $50 and your child typically saves $3 per week, it will take a little longer than 16 weeks (four months) to have enough to purchase the item. Explain to the child that if he or she can save an extra dollar a week ($4 per week), there will be enough money to purchase the item in just over 12 weeks (three months). Of course, it makes for a better teaching experience if the extra dollar per week is not saved at the expense of the “giving” jar, but rather earned through some additional activity or behavior.

Allowing a child to use his or her savings to purchase items is only part of the learning experience, however. Letting your child make decisions about what to purchase is also important. Children who save and spend their own money tend to become savvier consumers. They are also more likely to take better care of their possessions because they understand the sacrifice they made to purchase them. As the child gets older, introduce the idea that you expect him or her to pay for certain expenses out of the allowance you provide.

Depending on the child’s money skills and interest, you may want to begin discussing investing in stocks. Describe how purchasing stock makes the child a part-owner in a company, which means he or she can share in the company’s profitability. Encourage the child to research various companies. Typical candidates include a high-profile local company or a company that creates products or services the child uses. You might want to purchase a few shares of the selected company on behalf of the child and let him or her track the stock’s progress over time. If the company has a nearby location or is headquartered in your community, inquire about taking a tour with your child.

Giving jar
Let the child determine where the cash in the charity jar should go. The selected organization should reflect the child’s interests and age level. For example, if he or she loves animals, an animal-welfare organization may be a good choice. If there are multiple children in your household, help each one decide on a charity of choice.

If you use the three-jar approach, you will want to give the child the latitude to allocate the allowance as he or she sees fit—within reason, of course. But remember that it is not a bad thing to let your child make mistakes. We all learn by doing, and sometimes the most important lessons are learned when we fail to reach our goals. Generally, the stakes are lower at this stage in a child’s life. Let the child learn from missteps today before the consequences become much greater tomorrow.

Teenage Years: Stepping It Up a Notch
Accustomed to instant gratification and relatively carefree lives, many modern teenagers have a hard time understanding “no.” But your teenager’s desire for a new video game, phone, computer, or car can work to your advantage. Plan periodic family financial discussions where you begin to familiarize your teenager with the family budget. You may also choose to discuss some of the family’s longer-term goals and priorities, and perhaps how he or she can help you make progress toward these goals.

At this stage your teen may be interested in getting a job to earn extra cash. You will want to emphasize the wisdom in balancing work during the school year with school performance. Studies have shown that teens who work 20 hours or more per week achieve grades that are half a letter lower, on average, than those who work fewer than 10 hours.

If your older teen or college-bound student wants a credit card, be sure to impress upon your child that responsible use of credit cards is a common way to help establish a good credit history. Emphasize that paying off the balance each month in a timely manner is an important safeguard against becoming a credit risk.

Help your teenager understand that one of the keys to qualifying for the loan he or she will want someday is a strong credit score. Even beyond being a key indicator of whether or not an applicant can qualify for a mortgage or line of credit, credit scores are used in other ways that affect people’s lives. For instance, according to the National Association of Professional Background Screeners, 31% of employers will run a credit or financial check on at least some candidates for employment¹

Keep in mind that teens with credit cards are less price-conscious, more likely to spend more, and more likely to overestimate their savings than those who pay cash. Problem behaviors to watch for in your teenager include, paying bills late, not paying off credit cards in full, incurring late payments and fees, and bouncing checks. Remind your teen how stressful debt can be. Make it clear that a bad credit history can take a long time to correct.

Young Adults: Continuing the Education
College graduation day has finally arrived. Your child is one of the lucky ones to land a job with a regular paycheck. The urge to splurge may be tempting, but finding a balance between spending and investing in his or her earlier years may be crucial establishing long-term financial security. Some of the topics you may want to discuss include budgeting, “paying yourself first”, and the value of investing early.

Balancing inflow and outflow
Budgeting may sound intimidating to the uninitiated, but it is easier than it sounds and pays off for years to come. Boil it down to the basics for your adult child, and do not hesitate to return to the concept of three jars or “buckets”: one for spending, one for savings, and one for giving. In some instances, you may want to add a fourth bucket for “luxuries.”

Your Financial Advisor can provide you and your adult child with helpful budget worksheets. Your adult child will be asked to list income sources, such as wages, investment income, bonuses, etc. After that, he or she will list expenses, such as mortgage or rent payments, utilities, groceries, gasoline, or transportation costs, insurance costs, etc. Those expenses go into the “spending” jar.

Taking control of expenses
If expenses exceed income by a narrow margin, your child may be able to fix the problem by cutting some variable items listed in the expense column and transferring them to the “luxuries” category. For instance, a monthly clothing expense or cash set aside for restaurants or entertainment could be adjusted. If the margin separating income and expenses is greater, he or she might find it necessary to look for ways to reduce housing costs.

Some common guidelines for spending are shown in the table to the right.

Building savings
One of the easiest and most practical ways to ensure that your adult child invests for the future is by encouraging the principle of “paying yourself first.” Assuming the child has a job, recommend participating in the employer-sponsored retirement plan if one is available. If the plan offers an automatic payroll deduction feature such as with a 401(k) or 403(b) plan encourage the child to enroll. If the employer provides a matching contribution, encourage him or her to contribute at least the amount that will be matched as such contributions are essentially “free” money. Plant the seed of intention now to increase retirement-plan contributions as his or her salary grows, which will ease the path toward eventually reaching the maximum annual contribution amount.

More affluent families may also want to reward saving. If you or a grandparent expect to have a taxable estate someday, gifting to a child or grandchild may be beneficial. You may want to tie the gift to the saving behavior. Grandparents could make it clear that if children or grandchildren increase their savings amounts in a company-sponsored retirement plan or IRA, grandparents would be inclined to gift an equal amount to the child or grandchildren. If your adult child’s employer does not provide a retirement plan, encourage a systematic way to begin investing in a traditional or RothIRA.

For adult children whose adjusted gross income (AGI) falls below certain limits, remind them of the saver’s credit. The credit is equal to a specific percentage of employee contributions made to a retirement plan or IRA. The specific percentage depends on the taxpayer’s filing status and income. Ask your Financial Advisor and tax consultant about more information if you think your child may qualify. You will also want to educate your adult child on the value of dollar cost averaging, reinvesting dividends, and investing in other tax-deferred accounts.

Regardless of the method used to begin investing systematically, there is potential benefit to starting a savings program early, as illustrated in the chart to the right. The early saver deposits $250 a month for 10 years (a total of $30,000). The late saver waits 10 years, then begins to deposit $250 a month for 30 years (a total of $90,000). Assuming an 8% compounded interest rate², the early saver is left with a substantially higher savings account balance despite a much lower personal investment, demonstrating the value of time.

Developing social responsibility
Along with a career and financially stable life comes a social responsibility to give back to the community. This presents a good opportunity to revisit the “giving” jar with your adult child. Just as with younger children, you may want to suggest that your adult child set aside a portion of his or her inflow for charitable purposes. Though your child’s values may differ from your own, the goal is to encourage your child to support initiatives consistent with his or her ideals.

Preparing for marriage and children
As your adult child matures, marries, and begins a family of his or her own, you will want to continue to encourage sound financial management. It is important to review family protection programs including life, disability, and health insurance. Remind your child to inquire about flexible spending accounts (FSAs) through his or her employer. Of course, he or she will also want to ensure that proper estate documents—at least a will and durable power of attorney—are in order. Depending on your child’s financial success, this may be the appropriate time to reintroduce him or her to your Financial Advisor, who can offer an array of financial services and programs to assist your child in achieving the same financial success you enjoy.