By Liz Frazier, CFP, MBA
January is the time for resolutions, new beginnings and creating positive habits. One of the best gifts you can give your child for the New Year is to teach them some financial basics to build healthy habits that last a lifetime.
Pay it forward
The most valuable tool for teaching your child about money is … money! Having their own money at a young age gives kids the opportunity to practice money management in a safe environment. They can practice how to make smart financial decisions, and just as important, make mistakes. At this age, mistakes have no real consequences, but they learn from them … and hopefully will want to avoid them in the future.
While there’s no right or wrong way to give an allowance, a simple way to set it up is to give your child a set amount of money each week as an allowance. This should not be tied to any specific chores or jobs. Separately, make it clear to them that as part of the family, they are expected to do certain daily chores like making their bed, put away their dishes, and clean up their toys. This avoids the whole, “No I will not pay you to clean your room!” conversation.
Tell them if they want to earn additional money, they can do other jobs around the house that are above and beyond their normal chores. Some examples are washing windows, giving the dog a bath, washing your car, or raking the leaves.
This approach gives parents a real world, enforceable way to give their children allowance. It removes the gray areas, sets clear expectations, and gives their child real money to learn from.
Three piggy bank system
Once your child has their own money, you can set up the three piggy bank system to help them learn to manage it. Label three clear jars with SAVE, SPEND, and SHARE (I like clear ones so they can actually see their money grow!). Explain to your child that any time they get the money they need to divide it between these three jars. Don’t worry about how much goes in each. I actually let my kids choose how much they put in each jar. By empowering them to make their own decisions, it gives them a sense of ownership, independence and keeps the experience positive.
This is their money to spend on whatever they want. This jar teaches your kids about responsible spending and making smart decisions. When your child wants to buy something, you can help them learn smart spending by walking them through the decision-making process. When they get their sight set on something, ask questions like “Why do you want to buy that?” and “What else could you do with that money?” Ultimately let them make their own decisions on what they buy with this money. It’s hard, and all parents scream inside when their kid wants to buy some horrid cheap toy that you KNOW will immediately break … but the best thing for them is to make these mistakes now and learn from them while they’re young.
This is money that your child puts away for something later. A great way to get your child excited about saving is to create a savings goal. Have them choose something to save for and create a savings goal poster (think old-school sales thermometer charts). Keep track each week of how much they save and create milestones for motivation. This can be an ice cream sundae when they save $10, or maybe a $10 match. The goal is to keep them excited and engaged so they see saving as a positive.
The share jar money is used to help others. They can choose to donate it to a charity, give gifts to kids in need, or to buy dog food and supplies for the local animal shelter. The key is to identify what your child is passionate about and let them choose where their money goes. Kids are kind and generous by nature, and sharing gives them a sense of pride, accomplishment and builds confidence. Not to mention the positive impact it has on all those around them.
Liz Frazier, is a fee-only Certified Financial Planner and author of Beyond Piggy Banks and Lemonade Stands: How to Teach Young Kids About Finance.