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 may be the right time to turn this opportunity into a teachable moment. Helping young children build financial literacy can pay great benefits 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 enough1.
More than 40% of the world lives on less than $2 a day2. These are the families that don't have enough. About three-quarters of people in America live paycheck to paycheck, so they're in the "just enough" group. The "more than enough" group can afford to pay for what they need 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 enough3.
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. Understanding that helped open the way for further discussion about the difference between the things we want and the things we need. Our 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 "Family and Money" section at bettermoneyhabits.com, including a video called "Teachable Money Moments for Your Child."
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1 Adapted from the ideas of “More than Money.”
2Source: Population Reference Bureau. (2011). 2011 World Population Data Sheet, prb.org.
3Source: 2013 BankRate.com Survey, as referenced in Johnson, A. (June 24, 2013). “76% of Americans are Living Paycheck-to-Paycheck” CNN Money, CNN.com.