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Finance for Kids – the important lessons you must teach your children

Teaching finance for kids is critical to their success as adults – children need to understand the cycle of money and the principles of modern finance. They need to understand that money has a value, money is earned, money needs to be saved to achieve long-term financial goals and needs to be budgeted.

The Value of Money

You want your kids to be comfortable talking about money, setting financial goals, and managing their own money. So for your children to understand these money matters, they need to understand that money is valuable. Children don’t always realise that money is valuable – they just see it changing hands as a means for buying things.

For children to understand the value of money they need to learn that:
  • The supply of money – income – is limited. Pocket money or an allowance is a great way to illustrate this concept because they get the same amount of money – and no more – each week.
  • Money is only received in exchange for something – usually work effort. Again, pocket money can be used to teach this concept if you set chores for your kids that they need to complete in order to receive their allowance.
  • They don’t always have enough money to buy what they want – so the value of saving money for these purchases by spending money wisely and by putting a little aside each week - is also an important lesson.
A parallel lesson here is “value for money” when it comes to purchasing items. Show them that they can make their money go further by comparing prices of different items and at different shops, and by shopping during bargain sales.

Responsible Spending

Adults don’t always spend their money responsibly, and it may be a difficult lesson for children to understand. But if they can understand the value of money, then they can also begin to understand why they shouldn’t just spend all their money on pay day!

So help your child make a list of all the things they might WANT to buy, and another list of things they NEED such as lunch money. Remind them that they really don’t need a pony! With the WANTs list, prioritise them into “really really want” and “just nice to have”. This way, you’re starting to introduce the concept of spending priorities. And agree spending limits – you may want to limit how much of your child’s allowance they can spend on junk food for example.

Make sure your child keeps all receipts or at least writes down their expenses so they can see where their money is going.

Little by Little it all adds up

Kids need to understand that although they may not have enough money NOW for a particular item, little by little all the bits of money they save all adds up.

The "Piggy Bank System" is recommended by several experts as a way to get started on this money lesson. Get 4 piggy banks and label each one according to the purpose of the money inside it – today, tomorrow, future and gifts/ charity. Agree a budget or savings plan with your child and each week, divide their allowance between each of the piggy banks accordingly. Then each month, sit down with your kids and count out the money in each piggy bank to show them how – little by little – the money has grown.

This is an excellent way to teach young children the power of saving for the future. As your kids get older, it is important to move their money to a bank account where they will earn real interest but still be able to see the power of saving with compound interest!

You can also show your children how little by little it all adds up while shopping. Explain to them that they can purchase a 250 mL drink of juice from a café for $2, but you can also buy 2L of juice from the supermarket for $2! If you keep buying the 250 mL juice from the café, you will end up spending $16, when you could have had the same volume of juice for only $2.

Little by little, it all adds up through spending choices!

Financial Goals

Setting financial goals is something we should all do – including our kids – and this should be part of the budgeting process. In other words, help your children set financial goals, and then use budgeting as a way to achieve them.

Financial goals may be short term goals that they can achieve in the foreseeable future – up to say 6 months to 1 year ahead – and may include a savings goal for a computer game, special toy or event.

Long term goals are harder, because they take longer to achieve – up to 5 years for a child’s long term goal such as buying a car, paying for a special school trip or even a big ‘toy’ like a bike depending on how your child is.

Regardless of the goal, as a parent you can help your kids set and achieve their financial goals by helping them work out how much money they need to put away each week to achieve their goal in the desired timeframe, and then monitor their progress towards their goal by counting out the money saved every month or two.

Your children will be surprised how quickly they can achieve their goals in this step-by-step approach.

It’s also good to discuss their goals from time to time, to remind them of why they chose the goal in the first place. Of course, for a long term goal, it’s better to put the money into a bank account for security and also so they can benefit from some interest earnings too.

Money for a short term goal can also be put in a bank account, or just saved in a piggy bank which serves as a constant – and physical – reminder of progress.

When they have saved enough money for their goal, help them obtain the goal and celebrate their success with them and the family – don’t underestimate how much of an achievement this is for kids! Heck, even some adults can’t achieve financial goals!

Depending on the goal, you may chose to assist them with payment by matching their savings in put – so for every dollar they put in, you put in a dollar (or other agreed amount) as well. But this obviously needs to be negotiated with your child, and for a special goal.

The power of budgets

Once you’ve agreed some spending limits and set financial goals with your children, it’s time to help them prepare a budget.

Agree with your children how much of their allowance they are allowed to spend each week, how much is put towards short term savings goals, how much is put towards long term savings goals and how much goes towards gifts and charity.

There is a budget template for kids in the ToolBOX you can use for this purpose. Or you could try the MoneyTree Personal Budget Software - it's easy to use, and the best value software for personal use available. And since our kids seem to know more about computers than their parents, it's an excellent way to engage them in financial planning.

It’s not all about the money

It’s easy for children to get the message that money money money is all that’s important. But we all know that money is just a tool for living and money itself doesn’t provide happiness. And it’s hard to get this message through to children – after all money will but lollies and toys and all those great things that kids love so much!

So to help them understand this lesson, it’s useful to introduce the concept of charity and using your money to help other’s who may not be as fortunate. Get them to pick a charity they would like to support – perhaps they could sponsor a child their own age through Worldvision - and agree an amount of their allowance that they are going to donate to this cause.

Also encourage your child to partake in volunteer activities so they understand that helping others can be its own reward.

Develop a career path
While you may think it’s too early to start thinking about your children’s career path, it’s never too early to introduce the concept of a career and how their career choice will affect their finance as adults.

Talk about different careers and what they do, what you need to do to become one and what sort of salary range they could expect. And I know we’ve all told our kids that they can be whatever they want to be when they grow up, but there are some exceptions! Not everyone can be an astronaut or prima ballerina!

But it’s important to point out that the most important thing about their adult career is to chose something they like – after all they will be doing it 40 hours a week, for the rest of their lives! And job satisfaction and happiness is worth far more than a massive salary!

I remember a friend of mine at school chose to study law because lawyers received the highest salary. But he hated law, failed miserably at Uni and now drives trucks for a mine (getting paid pretty well too, I might add). So the point is, pick something you like and are good at!

By discussing career opportunities with your children you can also help them achieve their career goals by steering them in the right direction in terms of school subjects, tutoring where required and extra curricula activities.

Of course, kids are known to change their mind – I always wanted to be a police officer and now I’m an engineer – so make sure you don’t eliminate other career options.

Again it’s a matter of support, guide and always remain positive – this is your child’s future we’re talking about! In the mean time, you can help your children develop some business sense by encouraging them to start their own business venture.
Also check out this great site on finance for kids. Related Topics:

Get your kids into financial planning early with this personal budgeting software from MoneyTree.

We are not certified financial planners or advisors. The information in this website is general information only. Always consult a licensed financial planner before making any finance or investment decision.

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