How to Set Your Child up for Financial Success

As you continue on your journey towards financial freedom, you may start to think about the legacy you leave behind. For many of our clients, this becomes a crucial conversation at around $5 million in investments. Security for themselves is no longer their main concern. Now, it is about making the right moves to have a lasting impact on their family.

How do you set your child up for financial success? What can you do now, to change their relationship with money and help them make better decisions?

Money is emotional, logical, and takes time to understand. Your approach should be similar and provide them with the right money mindset.

The best ways to set your child up for financial success are to teach money lessons around:

What is money? How is it used?
What do I value? How can I use money to support those values?
Create a framework for using money towards what you want in life

These lessons may look different at each age. We are big Montessori followers in my home, so we group the lessons based on the three planes of development: age 0-6, 6-12, 12-18.

Setting your child up for financial success: Age 0-3

From birth until 3 years old, the #1 thing you can do for your child is to model the behavior you seek. What is your own relationship with money? This is the time for you to go through your own money stories and understand why you view money the way you do.

To lead by example, you will need to ask yourself:

What does money mean to me?

What do I value in my life?

How do I use money to support those values?

Do I spend money in ways that do not align with my values?

From age 0 to 3, if you find you struggle with these questions, it may affect your ability to lead your child down a financially successful path. This is the time to learn more about your own money mindset and to set a new course to mentor your child. I love Morgan Housel’s Psychology of Money, Thomas Stanley’s The Millionaire Nextdoor, and John Bogle’s The Little Book of Common Sense Investing to start. These look at mindset and simple ways to start investing.

You should also ask, how do I want to support my child into adulthood? If you want to pay for their college education, a down payment on a home, etc. then the best time to start saving and investing for these goals is now 🙂

Setting your child up for financial success: Age 3-6

At age 3, we can begin to introduce money to our children’s experiences and concrete use of dollar bills and coins.

Name the ways we pay for things: dollars, quarters, checks, credit cards, etc.

Name the ways we make money: “I provide value to X by doing Y, and they pay me money for the work I do. I then use that money to buy what we need (and want) for our family.”

When you are at the store, include your child in the checkout process and help them give the cashier coins and dollars. We are building the muscle that money is used to buy the things we want and need.

If you buy your child a toy, go out to dinner together, or enjoy another experience that costs money, ask them some questions about how they value it.

Think of this as a ‘happiness test’. One of my favorite happiness researchers, Elizabeth Dunn, speaks of an example in her book, Happy Money: The Science of Happier Spending. I will butcher the example here, but the main point was when looking at a car purchase, the most happiness felt was before purchase. It’s about dreaming and the ideal – less about the reality. The happiest individuals with their car purchase were able to enact many of the wonderful things the car allowed them to do. So dream big with your kids about experiences and items they want to purchase, and then check in.

Keeping this in mind, we will review purchases together with our children:

Day of: How does it feel to have X? What will you do with it?
Week out: How does it feel to have X? Are you using it the way you wanted?
Month out: How does it feel to have X? When did you use it last?

Then, we will talk about the differences in what we felt when we purchased something vs how we value it over time. This often leads to, I have more fun with these toys when I get to play with them for a day or two. How can we borrow X toy instead of buy it and use money on something that made me happy longer term?

Setting your child up for financial success: Age 6-12

At this age, morality and independence become prominent. Children begin to take control of their own learning, so this is an age of supporting them on their journey.

Depending on where their interests lie, you may be able to help them set up to earn their own money. They may participate in a garage sale (to sell their old things), set up a lemonade stand on a hot summer day, or be ready for ‘extra’ chores that you will pay them for.

This is a great time to help them count their money and decide on how to use it. As a family, you may decide your child should have a similar strategy with money that you do.

How do you want to think about using your money towards investing, future wants, and current needs?
When you make $10, how will you allocate it towards those goals?
What is the best way to set up financial accounts based on those goals?

These are small actions that lead to great long term habits. Talk about what you do personally to augment their learning and understanding of the family finances as well.

Savings Strategies for Children

I like to think of this as a ‘hierarchy of financial literacy’.

When spending money, consider beginning with cash so they can feel the inflows and outflows. Younger children thrive on concrete concepts and this can help them better understand the flow of money.
Consider ‘appifying’ spending by finding online tools/games.
If saving for a larger purchase, consider a savings account specifically for the purchase so they can see how close they are to their goal over time. This may be a great time to learn about compounding interest as well.
For investing, consider opening a UTMA account with them and choose how to invest the money together. Note: depending on the size of the account you may run into ‘Kiddie tax’ issues. Please consult with your tax advisor.
As they work more, consider setting up a Roth IRA for long term compounding of investment growth.

Setting your child up for financial success: Age 12-18

The old saying is really true – kids do grow up fast. It’s hard to believe by age 12, children strive for social and economic independence and a sense of control of their life. They are already small adults (tears).

Here, we see children create their own identity and are more socially aware of what peers are doing/what they have. This is when ‘keeping up with the Joneses’ may start.

If you’ve set good financial habits by now, then it is time to start discussing the differences in spending money vs being truly wealthy.

Share the stories from the books I’ve mentioned above. Help them reframe what they see in that light.

This may be time to also discuss debt and leverage with your child. How spending can be augmented by loans and debt, and how this impacts future wealth.

Then, it’s time to discuss credit and how our financial system works in the USA. Being able to start building credit at age 12 is an opportunity for getting a better mortgage or student loan rate in the future.

As college approaches, discussing the value of college and what they want to get out of it. Let them know how much you can contribute and help them think through a budget for spending. There are many studies and helpful analysis tools for college and expert coaches to help.

How to Build your Child’s Credit

There are a few ways to build credit for your child. You can add them to your credit card as an authorized user, you may sign them up for a special debit card, or you may be able to get a secured credit card in their name.

Each of these methods to build credit have pros and cons. Making them an authorized user on your credit card is subject to age restrictions and may only influence their score minimally. If you give them the actual credit card, then spending limits will not be as easily controlled.

Secured credit cards and debit cards may allow your child to have a better impact on their credit score while maintaining more controls.

One card (and app) I’ve played around with is Greenlight. Greenlight is a card and budgeting portal for young adults. It costs around $5/month (their special), and has an entire platform built to help kids save, invest, spend, and build their credit history. There are other platforms as well, and the goal is to find the right one for your family.

Wrap-Up

In the end, there are many ways to set your child up for financial success. The actions you take as a parent to prepare yourself and your child are important. For both of you, the sooner you start, the better!

Ready to learn more? Check out other ways to launch your family:

If you would like guidance in developing your financial strategy to know what you can do to set your family up for financial success, please schedule some time to chat with us.

The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.