With an understanding of the value of money, kids can begin to learn how to use it wisely. Hopefully you've set the stage by modeling good money behavior whenever you can. For example, saying "I'll just use my credit card because I don't have cash," may send the wrong message about money--unless it's followed by "the credit card bill comes in at the end of the month, and I take money out of the bank to pay it."
Talk to your child about how you and your family use money. Explain to your child that your family has a budget and that budget is divided into monthly expenses and long- and short-tem planning. You can tell them:
"We have a set amount of money each week that we earn from working. We have to use that money for the following things each week: rent or mortgage, groceries, clothes, gas for the car, charity, and saving for your college and our retirement. That's why we have to plan ahead and not spend all of our money now."
To teach kids how to budget from their allowances, it helps to be very visual. Explain to kids that their money--just like yours--gets divided into money to save, spend, and share.
Get three or four clear plastic jars label each, and help your kids to count out their allowance payment into each jar.
10% Charity Jar:
For young ones, you select where this money gets donated. As kids get older, suggest giving to what interests them, perhaps to a local children's hospital or to save endangered animals. Here are some suggested charities for families
you and your kids can consider together. You could also create a dedicated charity bank for the whole family, like Diego's Family-Charity Bank
or Wonder Pets Family Charity Bank
. Everyone contributes to this bank equally, or parents match whatever kids put in it.
30% Quick Cash:
This is instant-gratification money. They worked hard; they should have some money to spend if they choose. However, you set the rules: If you do not allow your kids to buy candy, stick to it!
30% Short-Term Savings:
You are teaching your children to delay instant gratification and to set a goal and save for something larger. They get to decide what to save for. Perhaps your child wants a doll or a small toy, and your older ones might want a CD or a video game? Whatever they choose, keep in mind that for young children, ages 3 to 7, a few weeks is a long time. For older kids, ages 8 to 10, a few months is a more appropriate length of time to save up for something. So you might want to gently nudge them towards purchases they can save for in an appropriate amount of time or help them understand how long they would need to save before reaching their goal.
30% Long-Term Savings:
Budgeting is a habit, and the lesson needs to be repeated until it is understood, so bring your child on their first trip to the bank as young as 3 years old. By age 5, they should understand that a bank is a safe place to keep money and a good place to save money for a long period of time. From ages 7 to 10, they should start to understand that saving for college is one of your long-term goals for them and be able to contribute, so take kids in this age group to your local bank and set up a college savings account. They can deposit the money they save in their long-term savings jar each month and watch their savings grow.