The jingle of coins dropping into their piggy banks delights kids of all ages. They learn the connection between a dollar and the ability to buy things they like as early as age three or four. That knowledge comes naturally, absorbed from their surroundings without any need for parental instruction.
Teaching children how to handle money wisely, however, requires a considerable amount of forethought and ingenuity.
Where Money Comes From
Children often hear that money does not grow on trees, but might be left wondering where it actually does come from. Early on, introduce your child to the concept of earning money. Explain that a salary is money an employer pays you for providing a useful service or product. Then provide your child with opportunities to earn her own money. While some household help should probably be required of all family members without pay, consider offering remuneration for chores beyond the basics. Working for their own wages will help them grasp the value of money.
Learning to Save
Some children squirrel away their earnings naturally, while others cannot wait to squander their pay on whatever catches their eye. Teaching children to save and spend wisely is one of the most important life-lessons a parent can impart.
The first step is to make saving worthwhile. As David Owen explains in First National Bank of Dad, the traditional tactic of opening a savings account in a bank with a child might not be the smartest route to take. A six year old will have a hard time getting excited by the prospect of depositing $100 in his account, only to be rewarded by receiving enough interest to buy a pack of gum after a year’s time. The time frame is too long, and the interest too low, to encourage a small child to save.
What Owen did was to create a home bank with an interest rate of 5% monthly. His children quickly caught on to the benefits of saving. The interest rate can be adjusted as children grown and begin depositing larger sums.
Some parents might not feel comfortable with providing interest on deposits, for religious or other reasons. The parent bank idea can be adopted with a simpler structure where parents add to their children’s savings either upon deposit or withdrawal at a specified percentage. They key is to create a system that encourages kids to defer the immediate gratification of spending by making saving attractive.
Freedom to Choose How to Spend
Together with promoting saving, parents need to educate their children about spending wisely. One of the best ways to do this, while somewhat counterintuitive, is to allow children to make their own mistakes. Provide them freedom of discretion for how to spend their hard-earned, long-saved funds. This is not to suggest, of course, that you give them carte blanche to buy products that you consider harmful. However, within the boundaries of established family rules, let children purchase what they want.
How is this educational? What if, for instance, your child decides to spend his savings on the latest faddish toy? He will enjoy it for a short while, but in all likelihood, it will soon be collecting dust up on a shelf in his room. He will contemplate that purchase with wistful regret, and before he makes a similar mistake, he will consider more deeply how much he will benefit from his next buy. This may happen a number of times, but slowly children will develop a mature attitude towards spending. If a parent prevents them from making these mistakes at a young age, when the sums of money are relatively small, children will not experience the pangs of regret over money wasted. They will probably end up learning this lesson on their own with much larger sums of money.
Separate for Charity
Lastly, parents should impart to their children that money is a means to an end. In addition to teaching the value of work and the importance of thrift, parents can encourage kids to contribute a small amount of their earnings to a worthwhile cause. Have your child pick a charity she thinks is important. She can put money aside separately until she has amassed a sum large enough to donate. The satisfaction that comes from giving will help her realize that if she manages her finances wisely, she will have enough money left over to influence the world for good.