As adults, we've had a lifetime to learn how to manage our money and spend smart — but are we teaching our kids how to do the same? Finance may seem like a grown-up concept, but it's never too early to start teaching your children about managing money. Though you'll want to keep lessons simple for young children, starting early will help them learn the value of money and the basics of budgeting, so they'll have those skills when they're older.
Not sure where to start? We have some advice. Here are seven ways to teach kids how to budget and value a dollar, so they can start off on the right financial foot.
Give Your Kids Money to Manage
While a teenager may have a summer job, a younger child has no source of income unless you dole out an allowance. You can tie the allowance to chores (representing how adults need to work to earn money), give it out freely (to be sure they have money to manage), or some combination of the two. Whatever you decide, making sure your child has his or her own money is the first step toward teaching money management.
For younger children, keeping their cash in a clear jar can help, as it gives an easy visual representation of how much they have. Once they're teenagers, however, it may be time to trust them with their own bank account.
Teach Them Budgeting Basics
When children get cash of their own, they need to decide how to spend it — and that's the time to talk about savings. Let's say your child has an allowance of $5 per week, but wants to buy a toy that costs $30. While going out and buying that toy immediately isn't possible, your kid can set aside some money every week, then buy the toy later. That's the value of a savings account in a nutshell.
Sesame Street offers a simple suggestion to teach younger children about budgeting and saving. Instead of having your kids put their entire allowance in a single jar, get them to split it up into several jars: one for money they can spend now, one for money they're saving, and one for money to give to charity (or any other arrangement you'd like). Help guide your children in the right direction, but let them decide how they want to spend and save. Congratulations: Your children have just made their very first budget!
As your children grow older, move their budget to paper using a budget spreadsheet of some kind, whether it's digital or just kept in a notebook. They should record how much money they have, where their money came from, and what they're spending it on. This means that when they get their own bank accounts, they'll already know how to balance a checkbook.
Help Children Understand That Everything Costs Money
Your children need to know the value of their allowance compared to the value of the things they'd like to buy. When they want a new toy, point out the cost and remind them how much they have to spend. (This is a good opportunity to encourage kids to save money.)
When they're buying something with their allowance, make the process visual: Take the money from their jar, bring it to the store, and hand it to the cashier. They'll clearly see their amount of money shrink, though they'll get a toy (or whatever else they want) in return.
As your kids decide how to spend their money, also teach them to prioritize. If they spend all their savings on one item, they won't have the money to spend on other things they might want. Because they don't have enough money to buy everything they'd like, they need to figure out what's most important to them.
As they get older, you can give them more financial responsibility; for example, teenagers can pay for their own gas or cell phones. This is where tougher financial decisions come into play. In particular, kids must differentiate the things they want from the things they need. Your teen may want a new pair of shoes, but needs to have enough money to buy gas to get to work.
Show Them How to Shop Smart
While everything costs money, some options cost less. From buying generic products to doing cost comparisons, adults try to make their budgets stretch as far as possible — and you can teach your kids to do the same with their allowances.
Also talk about sales and coupons, which require patience but can stretch their allowance money a little further. Again, this will help teach your children how to prioritize: Would they rather pay full price for an item or wait for it to go on sale and keep the extra cash? Your children will be delighted to have more spending money, and will learn how to make the most of a limited budget. That's a skill that will come in handy later.
Let Them Make Decisions (and Mistakes)
Offer advice, but don't dictate what your children do with their money; allow them to make their own spending decisions. While they're likely to make mistakes along the way, it's better to make those mistakes — and learn from them — now rather than later.
Teach Your Teens About Credit Cards
Though credit cards are a useful financial tool, they can trick you into overspending and send you spiraling into debt. Explain to your teens how credit cards and interest rates work before they start getting inundated with credit card offers. Knowing the potential dangers can help them avoid getting in over their heads with credit card debt.
Set a Good Financial Example
Your kids watch what you do, so practice the same smart financial habits you're teaching them. One way to teach your children about finance is to involve them in your own financial decisions, which gives them context for the choices they see you making. For example, if you tell them you can't afford something they want, then turn around and buy a new television, that sends mixed signals. But if they know you've been saving up for a new television — that the entire family can enjoy — they're more likely to understand.
Depending on what you feel your kids are ready for, you could involve them in some financial decisions, like what the family should save for next (that new television or a beach vacation).
Readers, how are you teaching your kids to make smart financial choices? What's worked for you? Let us know in the comments below!