An AICPA survey discovered that parents are more likely to talk with their children about manners, eating habits, school grades, and substance abuse than about finances. All these topics are important, but it’s also vital to teach your kids the basics of handling money.

This conversation can begin when children are very young—even before they start kindergarten. One tactic is to give each child a piggy bank, which might hold spare change and even dollar bills. Once the children reach the age when they start learning counting skills, you can explain how five pennies make a nickel, two nickels make a dime, and so on, until you have dollars that can buy things in a store.

Parents also can open up bank accounts for youngsters; banks may have low or no minimums for children’s savings accounts. Parents can take their kids to the bank to make deposits and show them the results on bank statements. If the child’s account earns interest, that can offer another teaching opportunity.

 

Personal finance

At some point, children may receive an allowance, earn money for doing household chores, or both. Parents might explain the choices they’ll then face. Do they want to spend the money on something they want right away, put the money in their piggy bank to save for a larger purchase, or put it in the regular bank for a long-term goal? Yet another possibility is to give some of their income to those who are less fortunate. Altogether, such an exercise can give your kids the idea that there are many options for handling money, and they should consider the alternatives carefully.

Taking your child with you when you go to the supermarket, pharmacy, or hardware store can also be an educational experience. Children can see goods that are available at different prices; for example, buying a larger package often will require more money. Again, kids can see that handling finances involves making decisions. Even at a young age, children might be allowed to pick out one cereal from the rest or one type of treat for the family pet.

As children grow older, their desired items likely will become more expensive (such as an electronic device or an article of clothing). Through online, catalog, or in-store shopping, you can show them the price of the thing they’ve requested and explain that this is so many weeks of allowance or hours of household chores. You might set up a plan to save for this outlay, with a parental match as an incentive.

One worthwhile activity is to have your child keep a record of all the things he or she would like to have. The child can then organize those items based on “need” or “want.” New shoes might be needed, for instance, but a smartphone might be wanted.

From this list, you could lead into a discussion of what’s needed versus what’s wanted for you as a parent. Milk and juice from the supermarket might fall into the needed category, but a new car every year may be wanted yet not necessary. Explain that it’s fine to have things you want, but you may have to save for them over a time and forgo other items on the want list.

With preteens and teens, other topics can be discussed. You might show your child your checkbook, for example, and describe how you balance it every month. As they approach college, it’s time to talk about college costs at various schools and the results of using student loans to pay for higher education. When children get their first credit card, they should be told how credit scores are calculated and the importance of maintaining a good record of debt repayment.

 

Talking taxes

Preparing children for financial independence also means preparing them to be taxpayers. Some taxes are very visible; if you live in an area with a 5% sales tax, for instance, a $10 purchase winds up costing $10.50.

Other taxes might be illustrated by showing a pay stub to your son or daughter. Federal income tax will be withheld, usually along with state and local income tax. The same pay stub may also reveal payroll taxes withheld, such as those for Social Security and Medicare. (Eventually, a discussion of payroll taxes can lead to conversations about retirement planning and health insurance.) The key here is to make your children aware that a first job that pays $3,000 a month won’t provide $3,000 to spend every month. Only what’s left after taxes can be spent, with needs coming before wants.

 

Trusted Advice

2017 Social Security and Medicare Taxes 

• The Social Security tax rate is 6.2% each for the employee and employer.
• The Social Security wage base limit is $127,200. Wages in excess of this amount are not subject to Social Security tax.
• The Medicare tax rate is 1.45% each for the employee and employer.
• There is no wage-based limit for Medicare tax, which applies to all earned income.
• An additional 0.9% Medicare tax is paid by employees on earnings over $200,000 for single taxpayers or over $250,000 for married taxpayers filing jointly.