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Kids and Money

Teaching your children about personal finance will give them skills that they will use throughout their life.  Basic information on the value of money, saving, and distinguishing between wants and needs, though Listen to Start Teaching Kids About Moneyrelatively simple, can be the foundation for future financial independence.

When should you begin?  What should you teach them?  Here are some suggestions…

Introducing Money

Children can be introduced to money at an early age.   Even before they learn to count you can introduce a child to money.  A penny is a good introduction to currency since it’s different in color from the other coins, and unlike nickels, dimes, and quarters, one penny is worth one cent.  As soon as a child knows how to count, you can practice counting out pennies. From there, you can count five pennies and explain that they are worth one nickel; ten pennies are worth one dime; and twenty-five are worth one quarter.  You can also glue coins on a large piece of poster board to illustrate these relationships.

You will want to point out the different sizes of the coins, and their values.  Explain that even though a nickel is larger than a dime the dime is worth more.  Once your child has mastered the concept of coins, you can introduce the idea of paper money.  Just like the difference between the nickel and the dime, children often have difficulty at first understanding that paper money is worth more than the heavier, shinier coins. 

To help make the concept of currency practical to your child you can play “bank.”  Pretend you are a bank and practice exchanging different combinations of coins of equal value.  You can also play “store,” and further illustrate the practical uses of currency by exchanging coins for items of equal value.  Next, take the lessons into the real world by explaining purchases to your child.  Quick trips to the store for small items or even purchases at vending machines can drive home to your child the concept of money and its use as a mean of exchange for tangible goods. 

Listen to Kids and PurchasesAfter you child has grasped the concept of money and its value, you can guide them through small purchases of their own.  Coach them on presenting the right amount of money to the clerk, and counting the change received.  Keep your eyes open for teaching moments – anytime you pull out your wallet to make a purchase is an opportunity to reinforce the value of money to your kids.


Kids and Saving
Starting children on a savings habit can be as simple as tossing a few coins into a piggy bank or an old jar. Of course, the basic notion behind saving is that you are storing away extra today for a future goal.  A simple example of this is a squirrel saving nuts for the winter.   At first children may have a hard time understanding the concept of saving for tomorrow.   After they save a few dollars you can explain that they can use their cash on hand for an inexpensive purchase (such as candy or soda), or they can wait and continue to save their money for something of greater value (such as a toy or other more permanent item).
Listen to "Kids and Saving"
It’s easy to start saving, and while the piggy bank is a time-honored tradition, any container can be used to start a home saving habit.  A clear jar can be used, especially since it allows your kids to watch the money fill the jar.  You can make the savings a game, asking: “how much money do you think is in there now?” or “How much money do you think you’ll have when it’s full?”  Sorting the money and counting it will further reinforce basic money skills.  Try to make saving a regular habit, adding to their bank at the same time every day or week.  If you have a regular saving habit, you can teach your children through your example.  Explain to your children why you save, what you’re saving for, and how you save.

At some point, once you get your kids into the habit of saving, you’ll want to introduce them to the concept of interest.  The best way to do this is by helping them set up an interest bearing account at your local bank.  Explain that putting their money in the bank not only keeps the money safe from being lost or stolen, but the bank will also pay them for keeping their money on deposit.  If your child is old enough, they may understand the concept of compounding.  Explain that not only does their original deposit earn interest, but that if they keep their money in the bank, the interest will also earn interest helping their money grow that much more quickly.

An allowance is a good way to teach children about money. You can start an allowance when your child understands basic math skills.  They should also be able to understands the value of money, and realize that different items cost different amounts. Help your child understand there is a limited amount of money and they must learn to make good spending decisions.  Encourage your child to “pay themselves first” when they receive their allowance, that is, to set aside a percentage of their allowance for saving.
Listen to "Allowances"

How much allowance should a child receive?  That depends on their age.  An older child should receive more than a younger child, and occasional increases, perhaps tied to birthdays, will teach your child the concept of raises in salary.  A good rule of thumb could be a dollar a week for each year of your child’s age.  Also consider tying the allowance to certain duties and expectations (regular chores, good behavior, school performance).  This will also help give them a glimpse into how things work in the adult world.  You should also make it clear what they are responsible for under their allowance.  For older children this may include discretionary spending on clothing, music, video games, etc.

Wants vs. Needs

Listen to "Wants vs. Needs"An important financial concept for children (and adults, too!) is differentiating between wants and needs.  The best opportunity to discuss this topic is when your child is considering making a purchase.  Talk through the decision with your child.  Help him or her separate the items that meet a real need, and those items that just satisfy a short-term urge or desire.  Explain that saying “no” to a whim or desire will help them save for something better in the future.  Learning to budget for the things they need, rather than squander their money on what they merely want will help your children build future financial security.