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It’s never too early to start teaching kids about money and setting them on a path towards solid financial skills and health. It can start with a piggy bank, to introduce the concept of saving for a rainy day. An allowance can help them learn to budget and earn that giant stuffed unicorn.

Teaching your child the value of money — how to save, budget, and invest — is a vital life skill that isn’t part of most school’s curriculum. So it’s on you to prepare them for this aspect of adulthood. You may wonder how you can start teaching your kids about money. We’re here to help with advice on five simple and effective ways to kick off your child’s financial education. Let’s get going!

Money Management Explained

First, let’s look at the big picture. The goal is to impart knowledge about money management for kids…but what is money management anyway? Some adults can’t answer that question, let alone explain it to their children.

Simply put, money management is the practice of saving, budgeting, spending, and investing. Its principles help you stay on track in terms of money coming in, going out, paying off debt, and being stashed aside for short-term and long-term goals.

While many grown-ups may know that saving money is important, it takes an engaging approach to get kids psyched about hoarding their pennies rather than spending them on a video game. Figuring out how to help children learn good money management is a smart move on its own, but it can also wind up being a satisfying and fun experience for the whole family. It might even give you a renewed focus on your own money skills.

Recommended: How to Manage Your Money Better 

Teaching Kids Money Management

Teaching kids about money sets them up for healthy financial habits in the future. Children as young as three years old can start to grasp the basic concept of “We need dollars to get ice cream.” Talking about money and being transparent about your own financial life (“I got paid today,” or “I need to pay bills tonight”) begins to ground kids in the ebb and flow of finances. It helps a child learn the value of money.

Parents can use a routine trip to the grocery store to point out price tags and how some things cost more than others. Asking a salesperson or cashier, “How much is this?” can clue children in to a transactional truth: You have to have money to buy something. Paying bills in front of them helps illuminate household expenses, too. Now, let’s dig into specific strategies. Here are five ways to boost money management for kids:

1. Start with an Allowance

Having an allowance teaches kids how to earn, spend, and save money responsibly, all while contributing to the household. Most adults work for a living, so an allowance can be explained as a child’s or an adolescent’s version of a job.

The ground rules for a child’s allowance vary from family to family; some start a child off with an allowance at age four, and others at age 14. How much is paid varies, too; ask your friends what they dole out, or do a quick internet search of current allowance averages. Here are two common approaches:

•  Chore-based allowance. This is pretty straightforward. A child does chores in order to get paid. This system can instill a strong work ethic that will benefit children in the future. Some say a drawback of this method is that it could send a message that household chores are optional. Children shouldn’t be “bribed” to clean their room or take out the trash. But for many families, it works well.

•  Fixed amount allowance. You agree to pay your child a set amount of money every week or month, with the understanding that they contribute to keeping your household running. This arrangement allows a child to feel part of a greater whole — to be responsible for the tidiness of their room and offer to help with the dishes because that’s what family members do. But some may argue that paying children money for possibly doing nothing promotes a weaker work ethic and a sense of entitlement.

The choice is yours, or you can develop your own approach. There is no right or wrong way to establish an allowance for a child. As long as you’re clear and consistent about the rules and the monetary amounts, your kid will benefit from having cash in their money jar and from learning the value of money.

2. Focus on Saving

Once the allowance dough starts rolling in, many kids, especially younger ones, will want to rush out and buy as many $1-dollar toys as possible or a bunch of candy. Teaching your kids the importance of saving money is a vital component of good money management. Here are tips on doing just that:

•  Provide them with a special place to put their money. You could open a bank account for an older child. If you go this route, it’s a great teachable moment. Talk to them about why you are choosing a certain bank for the account: Is it the interest rate? The low fees? For younger kids, keeping money close at hand can work well. Having their own piggy bank or child’s safe will make saving more fun.

•  Offer motivating contributions. Make a deal with your child: If they can save a certain amount, you’ll kick in a little bit more. This rewards them for exercising restraint, and it’s similar to a vesting or “company match” principle, which you could explain to an older child.

•  Help them set saving goals. Just as adults are motivated to save when they want to have enough money for, say, a vacation or new car, guide your child to create target amounts to save and for a specific purpose. Or, you may have a child who just wants to see how high their savings can go. Which is fine! You can encourage them to save just to find out how much they can stash. It can be framed as a great way to start a nest-egg or emergency fund for future use.

3. Motivate Them with Purchases

That idea we just mentioned about saving towards a goal is a good one! Encouraging children to buy a big-ticket item with their allowance, like a bike or a video game, motivates kids to save money. Perhaps they’ll want to save a nice round number to give to a charity they are passionate about, or want to save enough to buy a scooter. Show them the ropes of how much to put into their fund and how often to reach their goal. Make a list with your child about their dream purchases. Share how rewarding it feels when you’ve worked, saved, and finally get to buy the thing you’ve always wanted or give to a cause that’s close to your heart.

4. Explain Budgeting

Teaching kids how to budget their money can help them reach their savings goals and ingrain healthy saving habits as they get older. There are a variety of budgeting strategies, such as a zero-sum, envelope, and 50/30/20 budget. If your child is old enough, acquaint them with how these work. Let an older child try out their favorite method: If they have an allowance, encourage them to track their savings balance in a journal, noting what they earned and what they spent every week. Being mindful of their deposits and expenses can help teach your child the value of money, an awareness of their spending habits, and how to change them to reach a savings goal. These are all great steps in teaching kids to budget.

Recommended: What is the Average Savings by Age?

5. Encourage Them to Invest

Earning. Saving. Budgeting. These concepts are essential when it comes to teaching kids about money. Once they’ve grasped them, and their piggy bank is filling up, you can even lead them to investing their money. Start simply. Perhaps by saying, “What if there was a place you could put that $5 dollar bill, and have it turn into $10?”

Starting a savings account is a great way to teach kids about banking and investing. You can give them coin roll wrappers and take a trip to deposit them and grandpa’s birthday check. You might want to open a joint high-yield savings account with them, which will allow them to see the interest compound and accrue in real-time. Online banks often have the best rates for these.

Another way to build their financial IQ: Include them in casual conversations about your own investment strategies. Open the door for questions about stocks and the marketplace. When they’re ready, there are apps and online games where kids can practice investing with virtual stocks, so they learn about building a portfolio. You could collaborate with them to pick a stock and let them observe the rise and fall of its value. This kind of hands-on experience can really help children learn and become invested in money management.

Recommended: Tips for Teaching Your Kids About Investing

Benefits from Teaching Kids Good Money Habits

Teaching kids about money can help them understand the value of a dollar and is a key step in their financial literacy. Children who are aware of the concept of cash from an early age may be more self-confident about their spending habits and have less financial anxiety. The earlier you start, the easier it will be to impart more complex financial lessons as they age, setting them up for success when they get that first summer job or go off to college.

This can feel like a leap for parents who were raised in a “don’t talk about money” household or one in which only sons were given a peek into family finances. Talking about money, spending, savings, and taxes may feel a bit uncomfortable at first. But consider diving in: Like those other “capital T” talks you have with your kids, it’s an important topic to share.

The Takeaway

Teaching kids about money and how to manage it can prepare them to be financially responsible adults. Earning gives them purpose. “Saving for a rainy day” teaches the rewards of delayed gratification. Budgeting and investing can instill a sense of confidence and independence, not to mention pride. Like so many important topics, money is one of those things parents can tackle and set up lifelong good habits.

While we’re on the topic of good financial habits, shopping around for the best deal at a bank is a valuable step. SoFi, for instance, offers Checking and Savings accounts that can help your money make more money. Sign up with direct deposit, and you won’t have any overdraft, monthly, or minimum-balance fees eating away at your cash. And you’ll earn 4.60% APY, which is 41x the national average of other checking accounts.

FAQ

When should you start teaching kids money management?

Children as young as three years old can begin to understand the concept of paying for something and saving money in a piggy bank. Some parents start giving kids an allowance between the ages of four and seven, which can also help teach financial literacy.

What are the benefits of teaching kids money management?

Teaching kids about money sets them up for good financial habits in the future. It teaches responsibility, money savviness, and independence — a great asset as they grow toward adulthood.

How do you teach kids the value of money?

Start by being transparent about your own spending and investing habits. Introduce the concept of saving with a piggy bank. Encourage them to have a goal, like saving for a new bike. Then help them achieve it by providing an allowance and showing them how to budget.

Photo credit: iStock/kate_sept2004

SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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A personal loan can be a helpful financial tool when someone needs to borrow money to pay for things like home repairs, a wedding, or medical expenses, for example. The principal amount of a loan refers to how much money is borrowed and has to be paid back, aside from interest.

Keep reading for more insight into what the principal of a loan is and how it affects repayment.

Loan Principal Meaning

What is the principal of a loan? When someone takes out a loan, they are borrowing an amount of money, which is called “principal.” The principal on a loan represents the amount of money they borrowed and agreed to pay back. The interest on the loan is what they’ll pay in exchange for borrowing that money.

Does a Personal Loan Have a Principal Amount?

Yes, personal loans do come with a principal amount. Whenever a borrower makes a personal loan payment, the loan’s principal decreases incrementally until it is fully paid off.

Recommended: What Is a Personal Loan?

Loan Principal vs Loan Interest

The loan principal is different from interest. The principal represents the amount of money that was borrowed and must be paid back. The lender will charge interest in exchange for lending the borrower money. Payments made by the borrower are applied to both the principal and interest.

Along with the interest rate, a lender may also disclose the annual percentage rate (APR) charged on the loan, which includes any fees the lender might charge, such as an origination fee, and the interest. As the borrower makes more payments and makes progress paying off their loan principal amount, less of their payments will go towards interest and more will apply to the principal balance. This principal is referred to as amortization.

Recommended: What Is the Average Interest Rate on a Personal Loan?

Loan Principal and Taxes

Personal loans aren’t considered to be a form of income so the amount borrowed is not subject to taxes like investment earnings or wages are. The borrower won’t be required to report a personal loan on their income tax return, no matter who lent the money to them (bank, credit card, peer-to-peer lender, etc.).

Recommended: What Are the Common Uses for Personal Loans?

Loan Principal Repayment Penalties

As tempting as it can be to pay off a loan as quickly as possible to save money on interest payments, some lenders charge borrowers a prepayment penalty if they pay their personal loan off early. Not all charge a prepayment penalty. When shopping for a personal loan, it’s important to inquire about extra fees like this to have a true idea of what borrowing that money may cost.

The borrower’s personal loan agreement will state if they will need to pay a prepayment penalty for paying off their loan early. If a borrower finds that they are subject to a prepayment penalty, it can help to calculate if paying that fee would cost less than continuing to pay interest for the personal loan’s originally planned term.

How Can You Pay Down the Loan Principal Faster?

It’s understandable why some borrowers may want to pay down their loan principal faster than originally planned as it can save the borrower money on interest and lighten their monthly budget. Here are a few ways borrowers can pay down their loan principal faster.

Interest Payments

When a borrower pays down the principal on a loan, they reduce how much interest they need to pay. That means that each month as they make a new payment they reduce their principal and the interest they’ll owe in the future. As previously noted, paying down the principal faster can help the borrower pay less interest. Personal loan lenders allow borrowers to make extra payments or to make a larger monthly payment than planned. When doing this, it’s important that borrowers confirm that their extra payments are going towards the principal balance and not the interest. That way, their extra payments work towards paying down the principal and lowering the amount of interest they owe.

Shorten Loan Term

Refinancing a loan and choosing a shorter loan time can also make it easier to pay down a personal loan faster. Not to mention, if the borrower has a better credit score than when they applied for the original personal loan, they may be able to qualify for a lower interest rate which can make it easier to pay down their debt faster. Having a shorter loan term typically increases the monthly payment amount but can result in paying less interest over the life of the loan and paying off the debt faster.

Cheaper Payments

Refinancing to a new loan with a lower interest rate may reduce monthly loan payments, depending on the term of the new loan. With lower monthly scheduled payments, they may opt to pay extra toward the principal and possibly pay the loan in full before the end of the term.

Other Important Information on the Personal Loan Agreement

A personal loan agreement includes a lot of helpful information about the loan, such as the principal amount and how long the borrower has to pay their debt. The more information the borrower has about the loan, the more strategically they can plan to pay it off. Here’s a closer look at the information typically included in a personal loan agreement.

Loan Amount

An important thing to note on a personal loan agreement is the total amount the borrower is responsible for repaying.

Loan Maturity Date

A personal loan’s maturity date is the day the final loan payment is due.

Loan Interest Rates

The loan’s interest rate and APR should be listed on the personal loan agreement.

Monthly Loan Payments

The monthly loan payment amount will be listed on the personal loan agreement. Knowing how much they need to pay each month can make it easier for the borrower to budget accordingly.

The Takeaway

Understanding how a personal loan works can make it easier to pay one-off. To recap — What is the principal amount of a loan? The principal on a loan is the amount the consumer borrowed and needs to pay back.

Consumers looking for a personal loan may want to consider a SoFi Personal Loan. With competitive interest rates and a wide range of loan amounts available to qualified borrowers, there may be a personal loan option that works for your financial needs.

FAQ

What is the principal balance of a loan?

The principal balance of a loan is the amount originally borrowed that the borrower agrees to pay back.

Does the principal of the loan change?

The original loan principal does not change. The principal amount included in each monthly payment will change as the amortization period progresses. On an amortized loan, less principal than interest is paid in each monthly payment at the beginning of the loan and incrementally increases over the life of the loan.

How does loan principal work?

The loan principal represents the amount borrowed. Usually, this is done in monthly payments until the loan principal is fully repaid.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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After getting married, you’ll start to merge your life, your home, and possibly your finances with your partner. As you plan for the future, it’s helpful to consider the implications of student loans and marriage—which can affect your credit, your ability to get a home mortgage, and even the repayment of your student debt.

Consolidating your federal loans or refinancing student loans after marriage may be options to consider as you begin handling finances in your marriage and working together to reach your financial goals

Student Loans and Marriage

There are currently over 45 million borrowers in the U.S. and the total amount of student loan debt is $1.7 trillion. So the odds are high that either you or your partner may have student loans. As you begin planning for your financial future together, it’s helpful to look at how marriage can affect student loan payments.

Recommended: What is the Average Student Loan Debt?

What Happens to Student Loans When You Get Married?

If you haven’t already had a conversation about student loans and marriage before tying the knot, you and your partner should sit down and discuss your individual student loan debt: how much you have, whether you have federal or private student loans, as well as what your balances, payment status, and monthly payments are. It’s important to share this information since getting married may change your debt repayment plans.

If someone has federal student loans and is on an income-based repayment (IBR) plan when they get married, for example, their monthly payments may increase post-marriage as income-based repayment plans are determined by household income and size. Depending on how a couple chooses to file their taxes, the government may take a new spouse’s salary into account when determining what the borrower’s monthly payments should be.

Because federal student loan borrowers on an income-based repayment plan have to recertify each year, the current year’s income is taken into account which may be higher after marriage if both spouses work. If the borrower’s new spouse doesn’t earn income then they may actually see their monthly payment requirements drop as their household size went up, but their household income remained the same.

Household income also affects how much student loan interest a borrower can deduct on their federal taxes. It’s worth consulting an accountant if a newly married couple needs help figuring out where they stand financially post-marriage.

It’s also important to be aware of how marriage affects your credit score as how someone manages their student loan debt is a factor. Since spouses don’t share credit reports, marrying someone with bad credit won’t hurt your credit score. That said, when it comes time to apply for a loan together, a bad credit score can make getting approved harder—which is another reason it’s key to get on the same page about repaying any debt on time.

Recommended: Types of Federal Student Loans

Refinancing Student Loans After Marriage

Refinancing student loans gives borrowers the chance to take out a new student loan with ideally better interest rates and terms than their original student loan or loans. Some borrowers may choose to consolidate multiple student loans into one newly refinanced loan to streamline their debt repayment process.

The result? One convenient monthly payment to make with the same interest rate and the same loan servicer instead of multiple ones.

As tempting as it may be to combine debt with a spouse and work toward paying it off together, married couples typically cannot refinance their loans together and each spouse would need to refinance their student loans separately. But even though a couple can’t refinance their student loan debt together, they’ll still want to be aware of what’s going on with their partner’s student loans.

Recommended: Top 5 Tips for Refinancing Student Loans in 2022

How to Refinance Student Loans After Marriage

Refinancing student loans after marriage looks the same as it does before marriage and is pretty straightforward. The student loan borrower will take out a new loan, which is used to repay the original student loan.

Ideally, this results in a better interest rate which will help borrowers save money on interest payments, but this isn’t a guarantee. Before refinancing, it’s important that borrowers shop around to find the best rates possible as factors like their credit score and income can qualify them for different rates.

Borrowers have the option of refinancing both federal and private student loans, but it’s worth noting that refinancing a federal student loan into a private one removes access to valuable federal benefits like income-driven repayment plans and loan forgiveness for public service employees.

Refinancing vs. Consolidating Student Loans After Marriage

Borrowers can choose to refinance or consolidate their student loans before or after marriage.

If a borrower has multiple federal student loans, then they can choose to consolidate their different loans into one Direct Consolidation Loan. This type of loan only applies to federal student loans and is offered through the U.S. Department of Education.

This type of loan takes a weighted average of all of the loans consolidated to determine the new interest rate, so generally this is an option designed to simplify debt repayment, not to save money. If a borrower chooses to consolidate through a private lender, they will be issued new rates and terms, which may be more financially beneficial.

Consolidating through a private lender is a form of refinancing that allows borrowers to take out one new loan that covers all of their different sources of student loan debt. While some private lenders will only refinance private student loans, there are plenty of private lenders that refinance both private and federal loans. As mentioned earlier, refinancing a federal loan means losing access to federal protections and benefits.

Refinancing can be advantageous if the borrower is in a better financial place than they were when they originally took out private student loans. If they’ve improved their credit score, paid down debt, and taken other steps to improve their financial picture, they may qualify for a better interest rate that can save them a lot of money over the life of their loan.

Another option in refinancing student loans after marriage is co-signing a partner’s loan. Doing so may mean that you can leverage greater earning power and possibly better credit, but it also means both partners are responsible for the loan, and can put one partner at risk in the event of death or divorce.

Student Loan Refinancing With SoFi

SoFi refinances both federal and private student loans, which can help borrowers save because of our flexible terms and low fixed or variable rates. Borrowers won’t ever have to worry about any fees and can apply quickly online today.

Learn more about refinancing student loans with SoFi.

FAQ

What happens when you marry someone with student loan debt?

If someone’s new spouse has student loan debt, this indirectly affects them. While the debt won’t be under their name or affect their credit score when it comes time to apply for credit products with their spouse (such as a mortgage loan) their credit score and current sources of debt will likely be taken into account.

Is one spouse responsible for the other’s student loans?

No one spouse is directly responsible for their spouse’s student loans, but it’s important to work together to pay off student loan debt. Again, once it comes time to apply for a joint loan, any student loan debt can have an effect on eligibility.

Does getting married affect student loan repayment?

Getting married can affect student loan repayment if a borrower is on an income-based repayment plan for their federal student loans. This type of repayment plan takes household size and income into account when determining what the borrower’s monthly payment should be. If their spouse brings in an income they may find their monthly payments are higher, but if their spouse doesn’t have an income their payments may become smaller.

Photo credit: iStock/South_agency

SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.