Even before your chil­dren can count, they already know some­thing about mon­ey: it’s what you have to give the ice cream man to get a cone, or put in the slot to ride the rock­et ship at the gro­cery store. So, as soon as your chil­dren begin to han­dle mon­ey, start teach­ing them how to han­dle it wise­ly.

Basic Financial Education for kids

Mak­ing Allowances

Giv­ing chil­dren allowances is a good way to begin teach­ing them how to save mon­ey and bud­get for the things they want. How much you give them depends in part on what you expect them to buy with it and how much you want them to save.

Some par­ents expect chil­dren to earn their allowance by doing house­hold chores, while oth­ers attach no strings to the purse and expect chil­dren to pitch in sim­ply because they live in the house­hold. A com­pro­mise might be to give chil­dren small allowances cou­pled with oppor­tu­ni­ties to earn extra mon­ey by doing chores that fall out­side their nor­mal house­hold respon­si­bil­i­ties.

When it comes to giv­ing chil­dren allowances:

  • Set para­me­ters. Dis­cuss with your chil­dren what they may use the mon­ey for and how much should be saved.
  • Make allowance day a rou­tine, like pay­day. Give the same amount on the same day each week.
  • Con­sid­er “rais­es” for chil­dren who man­age mon­ey well.

Take it to the Bank

Pig­gy banks are a great way to start teach­ing chil­dren to save mon­ey, but open­ing a sav­ings account in a “real” bank intro­duces them to the con­cepts of earn­ing inter­est and the pow­er of com­pound­ing.

While chil­dren might want to spend all their allowance now, encour­age them (espe­cial­ly old­er chil­dren) to divide it up, allow­ing them to spend some imme­di­ate­ly, while insist­ing they save some toward things they real­ly want but can’t afford right away. Writ­ing down each goal and the amount that must be saved each week toward it will help chil­dren learn the dif­fer­ence between short-term and long-term goals. As an incen­tive, you might want to offer to match what­ev­er chil­dren save toward their long-term goals.

Shop­ping Sense

Tele­vi­sion com­mer­cials and peer pres­sure con­stant­ly tempt chil­dren to spend mon­ey. But chil­dren need guid­ance when it comes to mak­ing good buy­ing deci­sions. Teach chil­dren how to com­pare items by price and qual­i­ty. When you’re at the gro­cery store, for exam­ple, explain why you might buy a gener­ic cere­al instead of a name brand.

By explain­ing that you won’t buy them some­thing every time you go to a store, you can lead chil­dren into think­ing care­ful­ly about the pur­chas­es they do want to make. Then, con­sid­er set­ting aside one day a month when you will take chil­dren shop­ping for them­selves. This encour­ages them to save for some­thing they real­ly want rather than buy­ing on impulse. For “big-tick­et” items, sug­gest that they might put the items on a birth­day or hol­i­day list.

Don’t be afraid to let chil­dren make mis­takes. If a toy breaks soon after it’s pur­chased, or does­n’t turn out to be as much fun as seen on TV, even­tu­al­ly chil­dren will learn to make good choic­es even when you’re not there to give them advice.

Earn­ing & Han­dling Income

Old­er chil­dren (espe­cial­ly teenagers) may earn income from part-time jobs after school or on week­ends. Par­tic­u­lar­ly if this mon­ey sup­ple­ments any allowance you give them, wages enable chil­dren to get a greater taste of finan­cial inde­pen­dence.

Earned income from part-time jobs might be sub­ject to with­hold­ings for FICA and fed­er­al and/or state income tax­es. Show your chil­dren how this takes a bite out their pay­checks and reduces the amount they have left over for their own use.

Cre­at­ing a Bal­anced Bud­get

With greater finan­cial inde­pen­dence should come greater fis­cal respon­si­bil­i­ty. Old­er chil­dren may have more expens­es, and their extra income can be used to cov­er at least some of those expens­es. To ensure that they’ll have enough to make ends meet, help them pre­pare a bud­get.

To devel­op a bal­anced bud­get, chil­dren should first list all their income. Next, they should list rou­tine expens­es, such as piz­za with friends, mon­ey for movies, and (for old­er chil­dren) gas for the car. (Don’t include things you will pay for.) Final­ly, sub­tract the expens­es from the income. If they’ll be in the black, you can encour­age fur­ther sav­ing or con­tri­bu­tions to their favorite char­i­ty. If the results show that your chil­dren will be in the red, how­ev­er, you’ll need to come up with a plan to address the short­fall.

To help chil­dren learn about bud­get­ing:

  • Devise a sys­tem for keep­ing track of what’s spent
  • Cat­e­go­rize expens­es as needs (unavoid­able) and wants (can be cut)
  • Sug­gest ways to increase income and/or reduce expens­es

The Future is Now

Teenagers should be ready to focus on sav­ing for larg­er goals (e.g., a new com­put­er or a car) and longer-term goals (e.g., col­lege, an apart­ment). And while bank accounts may still be the pri­ma­ry sav­ings vehi­cles for them, you might also want to con­sid­er intro­duc­ing your teenagers to the prin­ci­ples of invest­ing.

To do this, open invest­ment accounts for them. (If they’re minors, these must be cus­to­di­al accounts.) Look for accounts that can be opened with low ini­tial con­tri­bu­tions at insti­tu­tions that sup­ply edu­ca­tion­al mate­ri­als about basic invest­ment terms and con­cepts.

Help­ing old­er chil­dren learn about top­ics such as risk tol­er­ance, time hori­zons, mar­ket volatil­i­ty, and asset diver­si­fi­ca­tion may pre­dis­pose them to take charge of their finan­cial future.

Should you give your Child Cred­it?

If old­er chil­dren (espe­cial­ly those about to go off to col­lege) are respon­si­ble, you may be think­ing about get­ting them a cred­it card. How­ev­er, cred­it card com­pa­nies can­not issue cards to any­one under 21 unless they can show proof they can repay the debt them­selves, or unless an adult cosigns the cred­it card agree­ment. If you decide to cosign, keep in mind that you’re tak­ing on legal lia­bil­i­ty for the debt, and the debt will appear on your cred­it report.

Also:

  • Set lim­its on the card’s use
  • Ask the cred­it card com­pa­ny for a low cred­it lim­it (e.g., $300) or a secured card to help chil­dren learn to man­age cred­it with­out get­ting into seri­ous debt
  • Make sure chil­dren under­stand the grace peri­od, fee struc­ture, and how inter­est accrues on the unpaid bal­ance
  • Agree on how the bill will be paid, and what will hap­pen if the bill goes unpaid
  • Make sure chil­dren under­stand how long it takes to pay off a cred­it card bal­ance if they only make min­i­mum pay­ments

If putting a cred­it card in your child’s hands is a scary thought, you may want to start off with a pre­paid spend­ing card. A pre­paid spend­ing card looks like a cred­it card, but func­tions more like a pre­paid phone card. The card can be loaded with a pre­de­ter­mined amount that you spec­i­fy, and gen­er­al­ly may be used any­where cred­it cards are accept­ed. Pur­chas­es are deduct­ed from the card’s bal­ance, and you can trans­fer more mon­ey to the card’s bal­ance when­ev­er nec­es­sary. Although there may be some fees asso­ci­at­ed with the card, no debt or inter­est charges accrue; chil­dren can only spend what’s loaded onto the card.

One thing you might espe­cial­ly like about pre­paid spend­ing cards is that they allow chil­dren to grad­u­al­ly get the hang of using cred­it respon­si­bly. Because you can access the account infor­ma­tion online or over the phone, you can mon­i­tor the spend­ing habits of your chil­dren. If need be, you can then sit down with them and dis­cuss their spend­ing behav­ior and mon­ey man­age­ment skills.

Relat­ed Arti­cles:

The 5 Most Valu­able Mon­ey Lessons for Kids

What to do when sav­ing for You & sav­ing for your Child’s Col­lege Edu­ca­tion

How to Save $1000

pre­pared by Broad­ridge Investor Com­mu­ni­ca­tion Solu­tions, Inc.