Ask your five-year old where mon­ey comes from, and the answer you’ll prob­a­bly get is “From a machine!” Even though chil­dren don’t always under­stand where mon­ey real­ly comes from, they real­ize at a young age that they can use it to buy the things they want. So as soon as your child becomes inter­est­ed in mon­ey, start teach­ing him or her how to han­dle it wise­ly. The sim­ple lessons you teach today will give your child a sol­id foun­da­tion for mak­ing a life­time of finan­cial decisions.

 

Lesson 1: Learning to handle an allowance

An allowance is often a child’s first brush with finan­cial inde­pen­dence. With allowance mon­ey in hand, your child can begin sav­ing and bud­get­ing for the things he or she wants.

Teaching kids about moneyIt’s up to you to decide how much to give your child based on your val­ues and fam­i­ly bud­get, but a rule of thumb used by many par­ents is to give a child 50 cents or 1 dol­lar for every year of age. To come up with the right amount, you might also want to con­sid­er what your child will need to pay for out of his or her allowance, and how much of it will go into savings.

Some par­ents ask their child to earn an allowance by doing chores around the house, while oth­ers give their child an allowance with no strings attached. If you’re not sure which approach is bet­ter, you might want to com­pro­mise. Pay your child a small allowance, and then give him or her the chance to earn extra mon­ey by doing chores that fall out­side of his or her nor­mal house­hold responsibilities.

If you decide to give your child an allowance, here are some things to keep in mind:

  • Set some para­me­ters. Sit down and talk to your child about the types of pur­chas­es you expect him or her to make, and how much of the allowance should go towards savings.
  • Stick to a reg­u­lar sched­ule. Give your child the same amount of mon­ey on the same day each week.
  • Con­sid­er giv­ing an allowance “raise” to reward your child for han­dling his or her allowance well.

 

Lesson 2: Opening a bank account

Tak­ing your child to your local bank or cred­it union to open an account (or open­ing an account online) is a sim­ple way to intro­duce the con­cept of sav­ing mon­ey. Your child will learn how sav­ings accounts work, and will soon enjoy mak­ing deposits.

Many banks and cred­it unions have pro­grams that pro­vide activ­i­ties and incen­tives designed to help chil­dren learn finan­cial basics. Here are some oth­er ways you can help your child devel­op good sav­ings habits:

  • Help your child under­stand how inter­est com­pounds by show­ing him or her how much “free mon­ey” has been earned on deposits.
  • Offer to match what­ev­er your child saves towards a long-term goal.
  • Let your child take a few dol­lars out of the account occa­sion­al­ly. Young chil­dren who see mon­ey going into the account but nev­er com­ing out may quick­ly lose inter­est in saving.

 

Lesson 3: Setting and saving for financial goals

When your chil­dren get mon­ey from rel­a­tives, you want them to save it for col­lege, but they’d rather spend it now. Let’s face it: chil­dren don’t always see the val­ue of putting mon­ey away for the future. So how can you get your child excit­ed about set­ting and sav­ing for finan­cial goals? Here are a few ideas:

  • Let your child set his or her own goals (with­in rea­son). This will give your child some incen­tive to save.
  • Encour­age your child to divide his or her mon­ey up. For instance, your child might want to save some of it towards a long-term goal, share some of it with a char­i­ty, and spend some of it right away.
  • Write down each goal, and the amount that must be saved each day, week, or month to reach it. This will help your child learn the dif­fer­ence between short-term and long-term goals.
  • Tape a pic­ture of an item your child wants to a goal chart, bank, or jar. This helps a young child make the con­nec­tion between set­ting a goal and sav­ing for it.

Final­ly, don’t expect a young child to set long-term goals. Young chil­dren may lose inter­est in goals that take longer than a week or two to reach. And if your child fails to reach a goal, chalk it up to expe­ri­ence. Over time, your child will learn to become a more dis­ci­plined saver.

 

Lesson 4: Becoming a smart consumer

Com­mer­cials. Peer pres­sure. The mall. Chil­dren are con­stant­ly tempt­ed to spend mon­ey but aren’t born with the abil­i­ty to spend it wise­ly. Your child needs guid­ance from you to make good buy­ing deci­sions. Here are a few things you can do to help your child become a smart consumer:

  • Set aside one day a month to take your child shop­ping. This will encour­age your child to save up for some­thing he or she real­ly wants rather than buy­ing some­thing on impulse.
  • Just say no. You can teach your child to think care­ful­ly about pur­chas­es by explain­ing that you will not buy him or her some­thing every time you go shop­ping. Instead, sug­gest that your child try items out in the store, then put them on a birth­day or hol­i­day wish list.
  • Show your child how to com­pare items based on price and qual­i­ty. For instance, when you go gro­cery shop­ping, teach him or her to find the prices on the items or on the shelves, and explain why you’re choos­ing to buy one brand rather than another.
  • Let your child make mis­takes. If the toy your child insists on buy­ing breaks, or turns out to be less fun than it looked on the com­mer­cials, even­tu­al­ly your child will learn to make good choic­es even when you’re not there to give advice.