Kids and Money: Teaching Kids Money Management Skills

You may think your kids are too young to learn money management skills, but the truth is that they're learning by watching you and seeing how you deal with cash, checks and credit cards. Take advantage of kids' built-in curiosity and you'll give them money advice that will serve them throughout their lives.

Toddlers may not be able to understand money, but they can certainly understand "stuff." By the age of two the "gimmees" have probably already started. Instead of seeing these requests for toys and candy as a battle, see them as a chance to teach. Saying no to some of these requests shows toddlers that they can't always have what they want-a very valuable money lesson indeed. You can also try introducing the concept of "later" by telling toddlers that they can't have what they want now, but they can have it in the future. This sets the stage for lessons on the importance of saving for big goals when your child is older.

By the time children reach preschool age, you can be sure they know what money is and recognize that it's worth having. This is a great age to teach your child about how money is earned and how it is spent.

  • Explain to your child that you have to work to earn money for all of the toys, clothes and other things that you buy. Children are generally very curious about a parent's job at this age, so seize upon this curiosity by explaining why you work.
  • Teach your child how to identify a penny, nickel, dime, quarter and dollar bill. Your child isn't likely to comprehend the differences in the money's value at this age, but successful identification is a good first step.
  • When your child picks out something to buy, let her handle the transaction. Handing over money will help your preschooler understand the connection between money and goods.
  • If you're ready to start your child on an allowance, hand over the money before you go shopping and only allow your child to shop until it is gone. This is a simple way to teach that the supply of money is limited.

Grade schoolers
By the time children enter elementary school, their understanding of money is fairly sophisticated. Kids at this age can probably count money and understand how to add and subtract money as well. This is the time to teach your child about how hard money is to come by.

  • Give your child a weekly allowance and explain that this must cover certain expenses, such as toys and arcade games. Make it clear that there will be no more money once the allowance is used up.
  • When your child asks you for an expensive toy, introduce the concept of savings. Tell your child to set part of the allowance aside each week until there's enough saved up to get the toy. Purchase a simple piggy bank to hold your child's savings.
  • Encourage your child to save money by matching contributions dollar-for-dollar.
  • Introduce the concept of interest by setting an interest rate that's added weekly, say 5%. At the end of each week, count up the money that's been saved and add the interest. Have your child track this on a simple chart to illustrate how interest increases the value of saved money over time.
  • Once your child has saved up $50 to $100, head to a local bank and open a passbook savings account. Review the balance with your child monthly.

By middle school, children know exactly how money is earned and spent, but they probably don't fully understand how hard it is to earn or how quickly it can disappear.

  • Encourage kids to start babysitting or to mow lawns around the neighborhood. This shows how hard you have to work to earn money.
  • Make allowance payments bi-weekly instead of weekly. This shows kids how to budget their money over a longer period of time.
  • Increase your expectations for what the allowance will cover, such as movie tickets, extra clothes or music.
  • Tie the allowance to a list of weekly chores around the house. Reduce the allowance if chores aren't completed.

High schoolers know a lot about money-mainly that they'd prefer to spend yours instead of their own. Now is the time to fine-tune your child's money knowledge and to teach principles of saving and investing.

  • Encourage your teen to find a part-time job. This teaches children how to keep to a work schedule and how to balance work and life. It also introduces the concept of payroll taxes.
  • Help your child open a checking account. This is an important step toward building credit. Make sure your child continues to put some earnings into the passbook savings account for emergency savings.
  • If you continue an allowance, switch to once-a-month payouts.
  • Expand your teen's financial responsibilities to include gas, cell phone bills or a portion of car insurance.
  • Introduce your teen to savings and investment vehicles like CDs, savings bonds and stocks. If you get annual reports from mutual-fund investments, review them with your child, explaining the concepts of risk and investment returns.
  • Let your teen draw up the budget for a birthday party or your next family trip.
  • Don't bail your teen out. Teens should experience the consequences of poor money management while the effects aren't too dire.
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