Responsible money management, and the freedom that comes with it, are high in the top tier of valuable life lessons. Make it fun. Start in preschool. No kidding.
I’ve interviewed sources and written magazine articles on this subject several times through the years. Here is a redux.
First, figure out your own money values
Do you believe it’s important to have a budget? Do you use one? Do gifts say “love” to you or are purchases part of your overall money plan without regard to impulses, seasons, special occasions, bargaining, emotions?
Are you living your values or at least working toward living your values, whatever they are? Can you be fair, disciplined and consistent if you let your child have his/her own money?
Is your goal to live freely, comfortably, or debt free? Is part of your monthly spending a charitable donation?
Begin with an honest evaluation of your own money management because children, just like adults, will push the boundaries of any money plan.
It takes money to learn how to handle money
Once you’ve decided how and why you spend your money, you can begin to teach your child how to do the same. In my opinion, the best approach is to provide money to a child separate from household chores and grades. In our house, routine chores were everyone’s responsibility as “citizens of the household,” extra chores were paid at a rate everyone agreed to, and grades came with their own rewards. Money management skills were taught with the weekly allowance.
With a predictable allowance, children try out the concepts of saving for big purchases, prioritizing goals and enjoying the earned splurge with “fun money.”
As soon as a child can recognize the value of coins, start a small weekly allowance that will be divided into jars on a percentage basis. I like jars for “fun money,” “big savings,” “college,” and “God’s work in the world.” (This last one was divided between church and two animal welfare charities of my son’s choosing.)
Do make sure you agree on what the fun money and big savings can be used for – if there are restrictions, spell them out in advance.
Web sources suggest that the going rate is between 50 cents and 1 dollar per age of the child per week. So, for a four-year old, the allowance might be two to four dollars per week.
Later, as your child matures and the allowance increases, you could make a jar for a gift budget, clothing, education, car, other. By the time your child is a teen, with this foundation, s/he should be able to manage all personal expenses confidently.
There are many benefits to the simple jar savings system. Children will see they don’t need to spend money on a fancy gadget or bank, learn a great variety of math and planning skills (addition, division, budgeting), attain what’s important to them, and grow in the invaluable discipline of not borrowing against future earnings and tapping other resources (i.e. their other jars, or you.) That is, children will learn the important lifetime lesson that they are in control of these decisions and never have to be in debt for impulse purchases.
Then, take your children to the bank once a month to deposit their long-term savings. When they are old enough to appreciate the value of an interest-bearing account, set up a small fund and let them track their progress on a simple spreadsheet.
Our success story
Although we have never had any extra money, I set a goal to get my son through college debt free AND with a targeted savings amount to establish himself in a new job without going into debt after college.
We all did our part – often living sacrificially, but keeping to the plan – and he did, in fact, finish a four-year private university degree debt free with enough money in the bank to either buy an inexpensive car, relocate and start work, or keep saving for the future.
This system works, especially if you start early.
For more information:
Our “jar method” is Dave Ramsey’s envelope system of staying on budget. For more information on how to use it yourself, visit www.daveramsey.com/blog/envelope–system-explained.
Encouraging children to be effective money managers will clarify your values, test your resolve and provide great reward. Enjoy the journey!