It's difficult for children to understand why money can't just appear out of nowhere. As much as we may want it to, money doesn't grow on trees or magically spit out of an ATM machine. Children must be taught the value of money and how to effectively manage it. What you do now will help shape your children's financial literacy.
There are simple ways to incorporate financial lessons into your child's daily life and they can be taught some of these concepts as early as age three. Here are a few to get you started:
Give an Allowance
Kids need to have some money of their own before they can learn about it. An allowance is an effective way of doing this for children as early as preschool age. It's teaching your child the pitfalls of impulse buying early on. Decide on an acceptable weekly amount, according to your family's budget, and kids will learn how money must be saved, in order to purchase something they desire. Use coins when possible, so your child can feel the money.
There is some debate over the risks of tying the allowance to chores. In reality, we are not paid for doing basic things around the house that have to be done, such as taking out the garbage. Parents who depend on cash to motivate their kids may have to keep raising the stakes and eventually lose their leverage.
Use a Clear Jar to Teach Budgeting Basics
This is an ideal way to teach younger children about the value of money. Set two clear jars in a visible spot and label each one "Spend" and "Save." A child's allowance can be divided equally between the two jars. The "Spend" money is for small purchases such as candy, stickers or any small treat. The "Save" money is for saving for more expensive items. Do not use a piggy bank, as the purpose is to visually illustrate the concept of money growing. A simple worksheet can help your child keep track of any expenses and income.
Set an Example
This is easier said than done sometimes, but the reality is that children learn by example. Little eyes will be watching you if you are constantly splurging, spoiling them, and living way beyond your means. What you do now in terms of money management will help shape your child's fiscal future. Have a healthy attitude about money, and let them know that adults don't always have the funds to buy a wish-list item – and that this is perfectly fine. As my grandmother used to say, "If it's worth having, it's worth saving for."
Encourage Entrepreneurship
Help your child earn money by encouraging his/her entrepreneurial spirit. This may be in the form of selling lemonade at a stand or baking cookies for a bake sale. This sort of endeavour can help instill lifelong lessons about initiative, money management and organization at a young age.
Sharing is Caring
Teach your child that money isn't just for buying new and fun things. Money can also be used to help people who are less fortunate. Have your child set aside a portion of a weekly allowance to donate to a local cause or charity. Every little bit counts – no matter the size of the donation.