How to teach children to have a healthy relationship with money

Money patterns observed in early life are a primary source driving financial decision-making in adulthood.

As a child’s primary educator when it comes to money, it is important that parents teach a healthy relationship with finances, experts say.

Money habits in adulthood are set by the age of seven years, according to research commissioned by the University of Cambridge in 2013.

By the age of seven, most children have grasped how to recognise the value of money and to count it, the findings revealed. They also understand that money can be exchanged for goods, as well as what it means to earn money and what income is.

“As we are living in a rapidly changing world, shaped by social media companies, influencers and sophisticated marketing campaigns that target young people, spending is much easier than saving,” says Chaddy Kirbaj, vice director at Swissquote Bank Dubai.

“This is a daunting reality for parents worldwide who worry about their children falling into bad spending habits. However, there are a number of tips parents can use to educate their children about the value of money and foster a healthy relationship with money from an early age.”

We asked personal finance experts to show how parents can instil a healthy money mindset in their children.

Teach children that money is only a tool

It is important to demonstrate to children that while money is important, it is a means to an end, not the end itself, Mr Kirbaj says.

“Setting money as the ultimate goal is sure to result in frustration. Therefore, parents should work with their children to develop a set of personal goals and show them how money can be used to help achieve these goals, rather than simply accumulating cash,” he says.

For example, one person might have lots of hammers but never uses them for good. Another person might have one hammer but builds lots of great things to make themselves and others happy, says Will Rainey, founder of Blue Tree Savings, a company that helps parents teach their children about money.

“The same with money. It is not about how much you have; it is about what you choose to do with it that is most important,” he says.

Allow children to earn money

Allow children to earn pocket money by having to do chores, among other things, says Rupert Connor, partner at Abacus Financial Consultants.

Help them come up with a list of potential money-earning jobs they can do on their own and in their own time, he says.

“Instead of giving them whatever they ask for, reward them for doing chores such as cleaning their room or taking out the trash,” Mr Kirbaj says.

“This will instil in them the idea that to make money, they have to do something productive and worthwhile.”

Do not spoil a child, Mr Connor says. Try to create a culture so that they want to earn pocket money for good behaviour to then buy something for themselves, he says.

Talk about money in a positive way

It is so important to discuss money with children in an age-appropriate manner and not shun it as a taboo or uncomfortable topic, says Smeetha Ghosh, co-founder and chief executive of Cashee, a digital banking platform for teenagers in the Mena region.

“Unfortunately, the latter is common in many cultures, even in the Middle East,” she says.

“If children grow up thinking money is a difficult or awkward subject, this might result in them having feelings of guilt, shame or fear later in life when it comes to money matters, causing unnecessary anxiety.”

Children should also avoid hearing things such as “money doesn’t grow on trees”, “we can’t afford that” or “never talk about money”, Mr Rainey says.

If children grow up with the impression that money is bad, they are much less likely to ask questions, want to learn more or seek help when they need it, he says.

Distinguish between needs and wants

It is important for children to understand the difference between “wants” and “needs” because everything they desire might feel as if it is a “need”, Mr Connor says.

“A powerful way of broaching this topic is to talk about what they want ‘now’ versus what they want ‘most’,” he says.

“Not only does this teach children to start thinking about the effects of delaying gratification, it also gives them the power to make choices regarding their purchases by considering the consequences.”

Encourage them to be autonomous

Children crave autonomy and doing things “my way” from a very young age, Ms Ghosh says.

“So, the best way to teach them to have a positive relationship is to empower them to make their own decisions about money,” she says.

Let children make mistakes, Mr Connor says. “Maybe they spend all their money on something silly. But do not bail them out and make sure they learn their own lesson,” he says.

Giving them a steady allowance they can budget and save allows them to make decisions on a smaller scale in their childhood that can grow to become habits they have for life, Ms Ghosh says.

“Parents should work with children to create a budget to teach them the tangible positive effects of organised spending in everyday life,” Mr Kirbaj says.

“Budgeting will help children to avoid chaotic spending and, instead, empower them to spend in an organised, sustainable manner, relying on their actual financial ability, as opposed to borrowing from others.”

Focus on what makes them happy

In most cases, children will say that the things that have made them happy have been spending time with family or going on a holiday or adventure, Mr Rainey says.

“This exercise allows children to see that money is better used to do the things that really make them happy, rather than spending it all on material things to keep up with the Joneses,” he says.

Teach children the pros and cons of using credit cards

Children should know from an early age the dangers of being in debt, Mr Kirbaj says.

“As online banking and digital payments become more pervasive, paying by credit card is very easy to do, which means that falling into huge debt is also easier than ever,” he says.

“Help your children to understand that the money from a credit card doesn’t belong to them — it belongs to the bank and they shouldn’t spend money they don’t have.”

Be a role model

In the formative years, children learn by watching things and people around them. Children may adopt the attitudes and behaviour that parents demonstrate at home, Ms Ghosh says.

“So, the starting point is to make sure you [parent] are able to demonstrate a healthy and positive behaviour with your money and that your words and actions are in alignment.”