Teaching Children Money Management
We teach children to save their money. As an attempt to counteract thoughtless and selfish expenditure, that has value. But it is not positive; it does not lead the child into the safe and useful avenues of self-expression or self-expenditure. To teach a child to invest and use is better than to teach him to save. —Henry Ford, My Life and Work
Why is Teaching Children Money Matters So Important?
When and where do children learn about money issues, such as financial responsibil-ity, savings, budgeting, debt and credit? Perhaps a little in high school, but a majority of children learn money management skills—good or bad—at home. Parents need to be proactive about teaching their children about money, or the world of marketing and advertising will teach them—incorrectly!
A nationwide survey shows that for the first time since 1997, high school students are doing better when it comes to money smarts. However, roughly 65%of those students failed the exam used to measure financial knowledge (in 2006, 62% failed).
Results of the 2004 Jup$tart Coalition for Personal Financial Literacy Study:
- 58.3 percent said skills are learned at home, verses 19.5 percent who said they learn such skills at school, and 17.6 percent from experience.
- Questions about income and spending were answered more correctly than ques-tions about money management and saving.
- 11.4 percent of students use their own credit card.
- 15.7 percent use their parents’ card and 4.8 percent use both their own and their parents’.
- Over one third (43.3 percent) of the students have an ATM card.
- Nearly 78 percent of the students have a savings and/or checking account with a bank.
- The 22.1 percent of the students without any bank account scored lower than those who have a savings and/or checking account.
So, children in high school are fairly active with money, but not necessarily in a posi-tion to make the best decisions. Parents can teach children good money management before they leave home, no matter their age.
*Information adapted from the Institute of Consumer Financial Education, at: http://www.financial-education-icfe.org/children_and_money/index.asp
Teaching Children Money Habits for Life, How Are You Doing?
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Day-to-Day Mini-Money Lessons
Money management must be learned and practiced. Consider teaching the follow-ing habits in everyday home and family life to better prepare your children for “real” life. These lessons can be included in day-to-day activities and errands, and don’t need to take much time out of any schedule.
- Discuss with your children the dif-ference between needs and wants. As basic as it sounds, many financial difficulties could be avoided if peo-ple understood that it is merely im-possible to have everything you want, and that some things are more important than others.
- Teach your children how to prioritize. Priori- tizing can help in many day-to-day decisions, beyond those dealing specifically with money.
- Help a child understand there is no such thing as a free lunch. If a child wants an item, help them earn and save money to purchase it without going into debt.
- Teach the value of working for money, whether by getting a job such as babysitting or a paper route, or by doing extra chores around the house.
- Include your children in the process of making a family monthly budget. Make a list of all your income. Then ask the children to come up with a list expenses, including rent or mort-gage, food, insurance, car payments and maintenance, clothing, and so on. Rely on past bank or credit card statements to see how much you spent on these in the past. Have a child find the difference between in-come and expenses. This monthly activity can effectively prepare a child for building his or her own budget.
- Give all family mem-bers a personal allow-ance, whether tied to chores or not, to give everyone an opportunity to manage their own money, no mat-ter how small. If your child wants to buy something not planned in the family budget, give the child the op-portunity to buy it or save for it with an allowance. Remember to explain an item can be purchased with saved money, and that the money will not be available to buy anything else the child may want if the money is all spent.
- Be patient. It may take a while for children to understand that once the money is spent they cannot have anything else, but they will eventu-ally learn—if you don’t give into cries for more money.
- Resist the urge to rescue your chil-dren. Stick to what you have stated about wants verses needs. This may become difficult while surrounded by other shoppers, but it will teach your children plenty about money and control, which will help them avoid unnecessary debt in the future.
- Give your children advice, but allow them to make their own decisions—good or bad. Children will learn the most from personal experience, per-haps especially mis-takes.
- Saving is an important habit to begin early—early in life and early in a budget. Teach your children to pay themselves first. This means the first money to come out of a paycheck or allowance goes into savings.
- Be sure there is a goal to work to-ward, such as saving for a trip to Disneyland, a new bike, a college education or simply a new video game. Help the child estimate how much the goal costs, and decide how much to save each month in order to reach that goal.
- Consider having children contribute to an overall family goal. Also, con-sider matching savings funds as an incentive.
- While grocery shopping, show your children how to comparison shop, pointing out ways to maximize your dollar, such as reading price labels for price per ounce, or using ads and coupons to plan your menu.
- Use play money while making a budget so children can visually see how much money goes to expenses.
- Give your children the opportunity to hand money to cashiers, bank tellers, parking attendants, etc.
- When writing out checks, show your children how to carry a balance in the check book register. Share your bank, credit card, and investment statements to teach how interest works. Look for opportuni-ties to teach money matters all around you.
- Remember that children at different ages conceptualize money matters differently. Gear money lessons around what is understood by the child, giving more responsibility to older children, but never underesti-mating younger children’s ability to observe your habits and attitudes to-ward money.
- Remember that one of the best ways to teach is by example—do your best to practice what you preach.
“The easiest way to teach children the value of money is to borrow some from them.”
All About Allowances
An allowance is “a fixed amount of money children receive on a regular sched-ule, with the understanding that they will pay for certain agreed-upon expenses.” Allowances can be one of the best ways to teach your children financial responsi-bility. Here are some tips for turning an allowance into an educational tool.
- No single allowance system will work for every family.
- Any system can work if: 1) it is given to children when they are old enough to manage it, and 2) the system is kept simple so that you can manage it.
- Studies show that children without allowances have access to just as much money, if not more, than children who do receive allowances. Allowances help you and children have more control over children’s finances—especially if it is clear that an allowance isn’t “bonus” money, but money that needs to pay for cer-tain expenses.
- Start when kids are young, usually about age six. This is when kids start to under-stand that some items are worth more than others.
- Be specific about what their allowance must cover. For younger children, an al-lowance can cover extras, such as toys. For teenagers, that allowance can include such items as clothing and transportation.
- Talk to other parents. Find out how much they give and for what expenses, to help you figure out where to start. But you are the one to make your own deci-sions—go with your instincts and values.
- Resist the temptation to come to their rescue. Let kids feel the effects of the buy-ing decisions, good or bad. If you’ll reinforce that they don’t get any more money, they’ll hopefully spend more wisely in the future. You do, of course, have the right to veto certain purchases that are unhealthy, unsafe, or in violation of your family’s principles. Spell those out in the beginning when discussing what allowances can and cannot cover.
- If giving to charity and savings are especially important to you and your family, have children set up portions of allowance for those purposes. Encourage chil-dren to save and give to charity as you would.
- Encourage kids to save a portion of their allowance to meet a goal of their own, such as big-ticket items like bicycles or iPods.
- Think twice before tying allowance to chores. It may not work for every child, and some parents would rather have chores tied to being a member of the family or household. A better idea might be to pay kids for extra-large jobs, such as washing the windows, raking leaves, etc. (Or, reward with something other than money, like going out for ice cream when the leaves are raked.)
- When it comes to paying for good grades—think again. Tell them you are proud of them, perhaps give a special treat such as a later bedtime. Paying money for grades distracts kids from the sense of accomplishment that should be their re-ward. But don’t turn money into a bribe.
- If your child misbehaves, discipline to fit the deed instead of docking their allow-ance. If they fight about TV, turn it off. If they don’t do homework, they don’t get video games. If you do dock allowances, don’t do it too often. If, however, the carelessness or misbehavior can be fixed with money, let them pay. For ex-ample, if they ruin their younger sisters sweater, make them pay for a new one.
- Remember, if your children pay attention to you in general and want your ap-proval, just telling them what you expect of them—and indicating that you’ll be disappointed in them if they don’t deliver—can get them to do what you want. Children will be more willing to cooperate if you are open to them when they have a complaint or problem.
- Give allowances on a regular scheduled day to simplify and lessen problems of over– or under-paying.
- If you don’t have time to develop an elaborate system—concentrate on what is most important to you. If nothing else, at least talk to your children about money when opportunities arise
Roberts' Rules of Money for Children
A detailed example of how one family teaches their children money management principles.
Early Elementary Age
Late Elementary Age
Junior High Age
High School Age
- Complete Guide to Home Canning (Agriculture Information Bulletin No. 539). 1994. USDA & Extension Service.
- Drost, Dan. 2005. Beans in the Garden. Utah State University Extension. Logan, Utah.