Most of us want our children to grow up to be responsible with money. Financial literacy is an important part of successful money management—if you start teaching your children basic lessons while they are young, they will have a firm financial foundation to build upon in the future. When brought up to know the value of money, children are more likely to exercise caution in their future dealings and be better at saving money.
Teaching basic money management concepts
Kids are visual learners, and it helps if they have something tangible to use when learning about money. Before my son actually began receiving an allowance, we had a system that allowed him to earn coupons that could be redeemed for TV time. Each DVD was labeled with a number indicating how many coupons each episode or movie required (single short episodes of a TV show cost only one coupon, while the longest movies cost four). He quickly learned that he could watch his favorite movie if he saved up his coupons for two or three days.
Basic systems like this translate quickly into an understanding of money handling. When we introduced an allowance, my son made the connection between coupons and money. However, he still needed to learn the value of money and how it was earned. I wanted him to earn money, but at the same time, I also wanted him to learn that some things are worth doing—even without pay.
Our compromise is to pay a small allowance that is not tied to chores (which he does because he’s part of the family) and to allow him opportunities to earn more money if he wants. As a result, he works hard to do well at 4-H projects to earn prize money, and he thinks of enterprises to undertake in order to earn more money. Allowing him to work for some of his money teaches him that it has value.
On top of this, I also teach my son basic money management concepts such as:
- Long-term saving
- Short-term saving
- Charitable giving
We use different jars and envelopes to teach these concepts so that he can see where his money is going. We also encourage him to rank the things he wants (sometimes using pictures he draws or cuts out of ads) so that he learns about priorities. He spends his money on the most important things first, and he forgoes the less important items.
Working with older children
As our son grows, we know that more lessons will need to be taught. If you begin when your kids are younger, it will be easier to teach more complex concepts later. One way to encourage pre-teens and teens to learn the value of money is to have them work for it. Jobs ranging from neighborhood babysitting and yard work to after-school employment at a local business can help kids learn the importance of work and provide them with money to manage.
It’s also possible to teach children concepts such as interest. Consider allowing your kids to borrow money from you if they ask for something they can’t afford. Explain that they will have to pay you back with interest—and that they can’t buy something else until the obligation is discharged. We tried this on my son, who didn’t want to save up money for a purchase. At first, he thought it was a great deal—until his money had to go to repaying us for the next three weeks and he saw that he had to pay extra back in interest.
You can also use the reverse to teach a lesson. Borrow money from your child and then repay it with interest. Show him or her that it is better to earn interest than to pay it. This can segue (for older children) into lessons on investing. There are a number of games online that can help pre-teens and teenagers learn about and practice concepts related to investing. These can help your child learn how to use money to make money.
Some additional ways to teach children money management skills include helping them open bank accounts, letting them make small mistakes with their money, and encouraging them to see that they can earn money on their own.
Miranda Marquit is a freelance writer and professional blogger specializing in personal finance, family finance and business topics. She writes for several online and offline publications. Miranda is the co-author of Community 101: How to Grow an Online Community, and the writer behind PlantingMoneySeeds.com.