Teaching your children how to effectively work with their money provides them with an important life tool that is essential for their future success. You can start from an early age to teach them how to effectively budget, how to save and how to focus on providing for their needs before spending money on things they want.
Learning how to create a budget and live within it is arguably the most important financial lesson any kid could learn. Luckily, it’s an easy one to teach. It’s never too early to start teaching kids to stretch their finances to accommodate their lifestyles. Start with an allowance that should cover all the ‘I want’ requests.
Lori Mackey, author of “Money Mama and the Three Little Pigs” suggests a 10-10-10-70 system for teaching kids to budget.
“When your child gets their first dollar, we suggest that you teach them to save 10 percent, invest 10 percent, give 10 percent and live from 70 percent. When you give them a dollar, you give them two quarters and five dimes and then you sit with them and say this dime is for something that is important to you or that you want to help,” she says. This money can go to a charity or school drive or to a family member who needs assistance.
The Value of a Dollar
Once your kids start getting the hang of budgeting, give them some practice. This could mean that they have to take care of their own budgets. Here you can give them a weekly or monthly budget and they have to use this to pay for all their own expenses like school lunches and trips, stationary, internet and phone bills.
You can also allow them to participate in the family budget. This means they can be responsible for planning the family meals for one week to fit into a budget. They can also do the grocery shopping so they get a better idea of what things cost and how much money is spent on day-to-day living.
Wants versus Needs
An important concept that goes hand-in-hand with budgeting is the idea of wants and needs. Helping your child to identify the difference between these is a lesson essential to effective money management. They must learn to identify their needs and budget to cover these before spending money on things they want.
Encouraging saving is a slightly more difficult idea as the deferred gratification can seem too far away for impatient children. One way to help is to have a piggy bank or jar. Watching the jar fill with savings each week is a good visual and tactile representation of the rewards of saving.
It also helps to have a goal to save towards. Start with short-term goals that are more attainable so that your child gets rewarded before they get bored or lose interest. Then help them to select bigger and more long-term goals when they get the hang of it.
The last 10% of their allowance should go towards long-term investments like college funds. You can also teach older kids how to invest their own money so that they understand how to do so for the long-term.