For many of us, personal finance and money management was not taught in school. We had to navigate the financial world on our own, learning as we went and sometimes making costly mistakes. Some people never quite learn how to manage their money and instead spend their lives dealing with large debts. This definitely isn’t a life anyone would want for their children!
You can start teaching children as young as four the value of money. Here’s how:
The first thing to teach your kids, or that they have probably noticed on their own is that money buys things. Get your child a piggy bank so that they can collect their money and see it physically. Next have them participate in an actual transaction so that they will see that money is spent in exchange for items that they want. It is also a great way for your kids to put their math skills to work. Younger kids can work on adding and subtracting while older kids can try to work out the taxes before heading to the register.
When your children are around ages 6-9 and they start getting an allowance, create a budget chart so that they can keep track of how much money they earn or receive each week and how they spend it. Seeing it visually will make it clear where their money is going.
As your children get a little older and prepare to enter high school (ages 10-15), it is a great idea to have them open their first bank account to start teaching them about the world of electronic transactions. Start sending their allowances by e-transfer so your children can learn how to move their money to and from their checking and savings accounts. This will get them in the habit of checking their account every “payday.”
Speaking of allowances, let’s discuss how your kids should receive money. In order for them to learn about money, they must understand that money is earned and not given. So instead of just giving your children a weekly allowance, they should earn it and you can even get this started very young.
When you kids are between the ages of 4 and 6 they can earn money through games of your choosing. They can earn a dollar for every stick they clear from the backyard or they could earn money from doing simple things like putting away their toys.
As your kids get older have them earn their allowances by doing chores, if they do not complete their chores they do not get their allowance that week, with the possibility of earning it back the following week. You can also have opportunities every few months where your children can earn bonus allowance by doing big chores like washing the car or cleaning out the pantry. Instill in your children that money is gained through effort.
Now that your kids are earning money they must also learn to save it. This is a crucial lesson for them to understand. Before we spoke about budgeting; budgeting and saving go hand in hand. Perhaps your child wants to make a larger purchase of an item that costs $10 but their allowance is only $6 a week. In order for them to get that item, they must save their allowance for two weeks to be able to buy it.
It is also a good idea for younger kids to have different money piggy banks, one for ‘Spending’ one for ‘Saving’ and one for ‘Charity.” Now if we have the same allowance of $6 per week that means $2 goes into each bank. And if your children are only allowed to spend money from the spending piggy bank that means they have to wait 5 weeks to purchase their $10 item. This teaches your children not to spend their money in the short-term but to save for the things they really want. Once they achieve this goal, they will feel quite accomplished.
Now I mentioned a charity piggy bank above and this is another great lesson to teach children from a young age. They may have noticed in school that there are kids who do not have toys or clothes that are as nice as theirs. It is important to explain that some people do not have as much money as others and sometimes it is good to give a little of your money away to help other people. Have your kids pick a charitable cause for their charity bank. Every year you can take them to donate the money they have accumulated to a good charity.
Borrowing and Debt
Lastly, it is important to teach your kids about debts and borrowing money. Credit card abstinence is not a realistic lesson to teach children in this day and age because credit cards are one of the few ways to earn a good credit score. Having no experience with them can be disastrous as an adult.
You can start teaching your older kids about borrowing and credit when they have large purchases they need to make. For instance, if they want to go on that expensive class trip or go to the amusement park with their friends. You can pay for the trip up front but then doctor their allowance by 50% going forward until you are paid back. While this may be frustrating for your kids it teaches them a valuable lesson. They get what they want right away but then they must deal with the long-term consequences of paying it back. In the future when they consider borrowing they will think carefully about it or even try to save up themselves for large purchases.
These lessons will prepare your children for the real world, allowing them to mature into financially responsible adults.