Teaching kids about money along with their ABC’s and 123’s makes a lot of cents. Opinions about how and when to begin teaching children financial basics may differ. The sooner kids learn that money can grow, but money doesn’t grow on trees, will pay off in compounded dividends. Teaching basic concepts about money doesn’t need to be a long drawn out lecture. Financial literacy can begin as early as two years old.
Here are some suggestions about how to tackle teaching young children about earning, spending, saving, and budgeting money.
Most children earn money by doing weekly chores around their homes. Then there are children who receive a monthly allowance without having to work to earn the money. Experts suggest teaching kids to view allowance like a wage. Chores should be assigned as the child’s job, then at week’s end evaluate the child’s performance, and pay them their wage. If the work is not completed, they do not receive their wages. Just like in real life. Bonus pay is possible if the child does work over and above their typical chores.
Cash and even gift cards can teach kids that money is finite, unlike a credit or debit card. A well-known study out of MIT showed that people are more likely to spend twice as much on an item when they purchase the same item using credit cards instead of cash. Learning how to spend money is an important lesson. For example, if a child receives a set amount to shop with in the form of cash or a gift card, they will have to make financial decisions based on the available amount of money they have to spend and not a penny over. Another tactic to teach children the value of a dollar is to have them consider the value of the item by teaching them to calculate how many hours they will have to work to earn enough money to pay for an item. Teach them how to convert hours worked into dollars. This will help them think about what purchases are worth their hard-earned money.
Teaching the importance of waiting to buy something can be a challenging concept for children and some adults to grasp. Learning to delay gratification will benefit them in the long run. This can be done with a simple piggy bank, or by setting up a no-fee savings account at a brick and mortar credit union or bank. Experts suggest helping your child set a goal for a future purchase. The goal is to set the child up for success, so the item should not be so pricey that it would take months to afford it. Every time your child adds money to their savings, help them count their cash or review their statement, and talk about how much money they need, and how long it will take to reach their goal. This exercise teaches them how to wait patiently while saving.
This step is more sophisticated and may be introduced during the tween/teen years. Keeping track of expenses and learning to distinguish wants from needs can be a struggle, even for adults. Having a budget teaches the importance of planning for the future by evaluating how much money they have or don’t have. A simple budget, broken into the following categories: earnings(income), spending, saving, and goals (e.g., a car) can be created with database software such as Excel or Google sheets, in addition to plenty of free online apps. Once a budget has been created, review it with your child regularly to get them in the habit of staying on track. Evaluate if they need to work harder (do more chores) to make more money or spend less for them to reach their short-term (video game) or long-term (used car) savings goals.
These basics of financial literacy are just the beginning. For those interested in a do-it-yourself approach, the California Department of Education has a number of K-12 financial literacy resources that can be found here. For those looking to enlist the advice of a professional, the California Department of Consumer Affairs, through the California Board of Accountancy, licenses professionals who are trained to assist people with all of their financial matters.