My son is almost a year old, so I am interested in the topic of teaching children about money management. I think teaching them about money can build a solid foundation that will result in a lifetime of financial well being. I have been reading various articles on this subject and here is my spin on it.
Photo by Daveybot via Flickr
The Four Pillars of Money Management
Out of all the things that you can do with money, I think there are four important lessons that you can teach your children.
1. How To Make Money
I think it’s important to teach your children that money simply does not appear out of nowhere. For the most part, making money is the result of trading your time for money — i.e., work. Yes, we talk often about passive income here, but let’s keep the lesson simple. For them, they should know that work equals money.
At the very least they should understand why you go away every morning and come back in the evening. It’s also good to help them understand that you are trading your time for money, as such money is a limited resource. Wouldn’t it be nice if one day your child say to you that he’s willing to give up his allowance so that he could spend more time with you?
The subject of whether or not you should give your children an allowance is debatable. Even more debatable is whether you should let them earn money for doing chores. Some will argue that this is a good thing. Others believe that children are responsible for chores with or without compensation. Personally, I think a small allowance is okay and there are chores that children should do without compensation. However, I also think that we should have tasks that they could perform in exchange for money.
2. How To Spend Money
Now that they know how money is made, they need to be able to make wise financial decision when they are spending it. I think an envelope system where you split money into “save” versus “spend” pile is too limited. I think children need to determine for themselves how to split the money.
I think spending money is a fairly complex topic and we can divide it into phases:
Phase 1 – Spending Based On Limited Resource.
They can spend whatever they earn but no more. If they want more, they’ll have to decide on what they are willing to give up. They’ll have to decide if they really want A or B — but not both.
Phase 2 – Spending Based On Value.
As your child advance, you could teach them about making smart spending decisions. For example:
- Spending more for a better-made toy rather than spending less on a cheaply made one.
- Spending less by waiting for things to go on sales.
- If you have more than one child, teach them how they could each buy a different toy and share.
Phase 3 – Spending Based On Needs And Wants.
As they mature in their spending habits, you could give them more control over their money. For example, give them a budget for a “back to school” shopping trip. As they walk through the store, they will be tempted by things they don’t need. Even for stuff that they do need, they’ll be presented with the options like buying a fancy notebook that costs $15, or a basic but functional one that costs $2. Your job is to help guide them and explain the difference between wants and needs; while it’s their responsibility to get everything on the list without blowing their budget.
I am tempted to add Phase 4 where children can borrow from their future allowances, but based on our national statistics, many parents need to learn this lesson themselves!
3. How To Save Money
It’s inevitable that your children will want to spend more than their weekly allowance at one point or another. This is a great time to teach them how to set financial goals and learn how to save money. For example, if they want a fancy book bag that costs $20, you could teach them how saving $1 a week can get them that bag in 20 weeks, or they can have it in 10 weeks if they manage to save $2 a week.
For a more advanced lesson, you could teach them about earning interest. For example, if they give you $1 a week for 5 weeks, they could earn interest and get back $6 at the end of 5 weeks. In my opinion, traditional bank is too slow to effectively teach children about saving money and earning interest. You’ll have to do some simulation here to help them appreciate the power of saving.
4. How To Give Away Money
Last but not least, children should be taught about charity. The first lesson should be about sharing things that they have with others. Later on, you could slowly expose them to worthy causes and ask if they would be willing to sacrifice a small portion of their allowance to support these causes.
Children are curious and there are plenty of opportunities to explain how things work to them. In these conversations, you could say that they could make a difference by donating some money and see how they react. But what ever you do, don’t force the issue. They need to understand why they are giving their money away, and let them give because they want to.
You’ll notice that the lessons above are basic and meant for younger children. As your children grow up, you should teach them about other money management topics, such as:
- Passive versus active income
- Saving for College
- Credit and debt; particularly how this can destroy their lives
Last but not least, you need to remember that children learn by observing how you do things — even more than by listening to you! So be sure to teach them by example and show them how it should be done. Most importantly don’t teach them one thing and do something different yourself.
Pinyo Bhulipongsanon is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.