A: My son actually asked a very similar question when he was about your daughter’s age. Children often become curious about money at a very young age—no matter what their parents’ income level. They see their parents purchasing things, or watch them withdrawing money from an ATM. And they tend to compare what they have with what their friends have. They may understand very little about how money works, but most kids want to learn.
You may not feel comfortable talking about money with your daughter. But while she may be too young to understand more than the basics, this could be an opportunity for a teachable moment. Helping young children build financial literacy can reap great rewards for them in the long run.
You don't have to go into great detail—keep your answer short and simple. An approach that works for a lot of parents when talking with children your daughter's age is to explain that there are three types of families in the world: those that don't have enough, those that have just enough and those that have more than enough.1
More than 10% of the world lives on less than $2 a day.2 These are the families that don't have enough. Most of their energy goes toward meeting basic needs: food, shelter and clothing. About three-quarters of people in America live paycheck to paycheck, so they're in the "just enough" group.3 If they had an unexpected, large expense, many families would have to take out a loan. The "more than enough" group can afford to pay for what they need (food, shelter, clothing) and still have money left over to save for later, to spend on things they may not need but would like to have, and to share with people who don't have enough.
You may want to let her know that your family is in this third group, and talk about what that means. For example, while we don't have unlimited money, we have enough for all our needs, some of our wants, some to save and some to share.
"Turn this opportunity into a teachable moment. Helping young children build financial literacy can pay great benefits for them in the long run."
Being intentional about thoughtfully answering money questions can send the message that it's OK to talk about money in our family, leading to more teachable moments. After describing these groups, you can start to instill in your child some of the most basic—yet important—values about saving and spending.
You might also consider asking your daughter why she asked that question in the first place. In my son's case, what he really wanted to know was if we could afford to buy something his friend's family had purchased. Understanding the reason behind his question helped open the way for further discussion about the difference between the things we want and the things we need. I explained that different families have different values when it comes to how they spend and share money. This means that not every family thinks about money in the same way.
Our family’s philosophy is sharing the right amount of information at the right time. Start by sharing your values with her, and when she's a little older, you can begin to explain your financial goals for the family.
You can find a variety of helpful information for teaching your child about money management in the Saving & Budgeting section at bettermoneyhabits.com.
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2 World Bank, “Poverty and Shared Prosperity 2016: Taking on Inequality,” 2016.
3 The Federal Reserve, “Report on the Economic Well-Being of U.S. Households,” May 2017.