Teaching ‘money smarts’ to your kids is critical – fail to do this and face a huge liability in your retirement.

The most effective way to teach money smarts to your kids is to become more financially disciplined yourself:  Earn money, save/invest/repay debt, give, and manage financial risk are the main areas that we’ve already covered. Do these things well and your kids will pick up on it and thrive. We’ve already covered some practical things you can do for your kids to get them working, saving, investing and giving. Now, let’s talk a bit about money itself. Kids find the concept of money hard to understand – the ‘physicality’ of money has been decreasing in the last 30 yrs and this further exacerbates this.

What is money?

It’s a store of wealth: You earn, and your effort is stored up in money. You work not only to cover costs but to build wealth and the money that you’ve accrued is the culmination of this.

It’s a unit of measurement: When describing what something is ‘worth’, money is a great way to do this. If something was ‘sold’ the money received is equal to the money required to buy it.

It’s a medium of exchange: You earn, then you get money – money is used to purchase goods and services. Bartering is the original form of currency – a ‘double coincidence of wants’. You have something I want and I have something you need. What happens though if you don’t have what I need but your friend does (sounds like university!)? Using money removes the doubt around ‘value’ and makes it possible to do business with whomever you please. Money is needed as it equalises everything by deducing it to a simple number.

It’s legal tender: Ever wonder what this means? Effectively it means that in the course of business, vendors would be required by law to accept money as payment for a thing/service. In the old days, money was linked to gold, so you could safely say what a dollar was ‘worth’ – we’ve moved on however from this to more of a ‘Fiat’ money world where it’s based on faith in what a dollar represents (that it will actually be accepted as currency at places).


So practically, how can we use the above to teach our kids what money is?

1.     My boy likes money as he can use it to buy Lego. To teach kids what money is, we need to find out what they really want. This will return the focus to what money really is – a unit of exchange.

2.     Give to those in need. Once they’ve put in a bit of ‘sweat’ to earn the cash, show them some people in need and try to explain how they got there. Encourage them (in a safe and respectable way) to give to those in need around them. Teaching them to defer self-gratification is a great way to teach them how to control how to spend their money.

3.     Set up a lemonade stand (or something similar). We recently gathered up some crusty old grapefruits from a tree on our property and tried to sell them out of the back of the car. I think we made 11 cents for 3 hours of work! Whenever the kids ask for something, I explain to them that we have to figure out a way to make some money – they begin to appreciate that things have ‘worth’ that way and they pro-actively start thinking of ways to earn.

4.     Watch your language. Never, ever say that you ‘can’t afford it’. This is poverty language pure and simple – you should rather say that ‘I’m not yet sure how we’re going to pay for that.’ This teaches kids that all things are possible, you just haven’t yet figured out how to do it. Focusing on the how to rather than the difficulty of, is the key here.

So there it is – teaching money smarts to your kids is absolutely essential. The world that you work in is tough, and it will be tougher still for your kids. No longer can you ‘coast’ through life and enjoy any degree of earned success – you have to fight for it. When kids see you and your attitude towards money and work it really affects them more than you know. Put another way: sorting your act out is really all you need to do!