We're all feeling the financial pinch these days. From soaring prices at the gas pump, to eye-popping utility bills, to wallet-draining supermarket trips, we're stretching our dollars farther than ever before. Your children have no doubt heard you talking about spending and saving lately. That makes it a perfect time to help them understand how money works — and to encourage wise financial habits that will pay off as they grow up to become savvy consumers themselves.
What Is Money?
Money can be a mystery to many children before the age of 5 — what are those pieces of green paper you pull out of your pocket or magically get from the ATM machine?
Start by explaining that money is something you receive, or earn, for working. Money doesn't grow on trees! Tell your child you exchange these earnings for what your family wants or needs and that you can only spend as much as you earn. Then reinforce those ideas with these suggestions:
- Talk about your job, and have your child playact a profession such as doctor, firefighter, etc., who goes to work each day. Make some pretend money she can bring "home."
- Set up a play store with your child as a customer and you as the storekeeper, and let her spend her pretend money. Reverse roles when she's ready.
- Give your preschooler a real dollar bill or some loose change (help her recognize the different coins) to get her used to handling money.
- Allow her to use her dollar when you're out shopping together to buy an item on her own. She'll experience the concept of exchange, which will help her understand it.
School-age children will have a better understanding of money, and, with any luck, you've had a chance to take your child to your job a few times to make the connection between work and earning. You can build on his growing financial knowledge by demonstrating how you make important family purchases, such as a week's worth of groceries. Try showing your child the receipt and pointing out the prices. You can also reinforce money skills by playing board games together such as Monopoly or the Allowance Game.
Start the Savings Habit
Many adults struggle with the idea of delayed gratification, and children are no different. They see it, they want it — now! Some people keep that outlook throughout their lives and end up spending beyond their means. You can help put the brakes on impulse spending by teaching your child the importance of saving — and waiting — for the things she wants.
Your preschooler should have a piggy bank. Give her coins on a regular basis to drop into the slot. She'll get a kick out of the sound of the plunk, plunk, plunk, and you'll help support her counting and coin recognition skills. At some point, you can open the piggy bank with your child and count the savings. You might then say, "Hey, look! We've saved enough to buy that toy or treat you really want."
By age 5, your child is ready for an allowance. Experts disagree whether allowance should be given with no strings attached or be tied to household chores. You might try the no-strings version and pay for extra duties like sweeping the front steps. Either way, be sure to set up ground rules, and try these tips to make your child's weekly "pay" more meaningful:
- Provide three piggy banks — one for spending on anything she wants, one for saving long term, and one for charity.
- Set savings goals together for the things she wants. Figure out how much she needs to save and how long it will take.
- Reward patience by adding a small amount of "interest" to her long-term savings at the end of each month. This can open the door to a discussion about how banks work.
Between the ages of 5 and 10 is an excellent time to take a trip to the bank and open a savings account. Let her know that this is one way to keep money safe and to build wealth as she makes regular deposits and her money earns interest. When your child contributes consistently to a savings account, she has money in case of an emergency, and she can save up for much bigger expenses later in life, such as college. Plus, it's exciting for kids to receive a bank statement in the mail (or view it online) to see how their money is growing.
Tweens and teens can come up with their own ways to raise cash. Your child may think of jobs in the neighborhood, from the traditional lemonade stand to walking pets to delivering the newspaper.
At around age 9, you can also introduce more sophisticated money-growing methods. If you have CDs or money-market funds, talk about how funds in these financial tools grow at a higher interest rate if left untouched for a specific period of time.
A Family Affair
The Financial Planning Association (FPA) says that you should consider showing older children how you make some of your financial decisions. Parents have different comfort levels with this, but the FPA says that by sharing such decisions you can provide some excellent real-life lessons. You can show your child how you use a budget, balance a checkbook, and keep credit spending under control.
Responsible money management is a serious topic. The good news is you can bring a sense of fun to teaching it and raise kids who handle their dollars with a lot of good sense.