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Kids as young as age three or four can grasp a general sense of the value of money. There are many ways you can help them understand it more fully as they mature.

“Money doesn’t grow on trees”

Your parents may have said this to you. Okay, so if money doesn’t grow on trees, where does it “grow?” While every child develops at a different rate, most young children can understand the concept of earning money for doing a job. You can reinforce this concept by paying them to perform household chores.

To teach kids how to use money, they need to have some. About 65% of parents give their kids an allowance,* which is like getting their own regular paycheck. They can use this money to buy the stuff they want. There are two questions you need to answer before going down the allowance road:

  • What is an appropriate allowance? An allowance might be directly tied to the child’s age, as older children may need more money to cover certain expenses. If you expect the allowance to be used for certain expenses, it should cover those costs.
  • How can the allowance be used? You can set percentages to guide how the money should be spent. For example, 10% to entertainment or toys, 20% to clothing, and 10% to a savings account.

Show the value of saving for the future

Making the process of saving visible, fun and physical can keep younger kids engaged. Use a large jar with a picture of a savings goal or a brightly-colored piggy bank. Devise creative ways to make counting and recording the money fun or open a bank savings account, which will introduce the concept of earning interest. Many banks offer special accounts for children with simple account management tools.

A good motivational technique is to match your child’s savings amounts, just as you might get in your workplace retirement plan. For example, you could contribute a dollar for every two dollars the child sets aside, and show them how the match is making their money grow faster.

Explain basic investing concepts simply

As long as you keep the jargon to a minimum, children as young as eight can begin to learn basic financial concepts, including:

  • Compounding – By reviewing bank savings account statements, you can show how money can be used to make money, and how any withdrawals may undo the compounding effects.
  • Stocks – Use brands your kids know (for example, Burger King, Mattel, Disney) to explain the concept of owning a piece of a company through stock purchases.

 

Teaching children about the basic concepts of money – how money is earned, how it is saved and how it is invested – may help them become financially responsible adults.

*Source: RoosterMoney 2017 Survey of 10,000 users of its allowance tracking app.

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