The other day my 3-year-old son said to me, “Just go to the bank and they’ll give you money,” after I told him we couldn’t buy a toy he wanted. I realized it was time to explain to him where money comes from.After all, “it’s up to parents to teach their kids smart financial habits,” says Jayne Pearl, coauthor of Kids, Wealth, and Consequences. Not sure where to start? Here, Pearl shares the most important money lessons for young children, and how you can help your child ace them.
Money Lesson: Money Doesn’t Grow on Trees
When kids see bills pop out of the ATM, they don’t realize that money is a finite resource. Explain that you work to make money, and the bank is just a place that keeps it safe (try to banish your cynicism about the recent economic crisis!).
Money Lesson: Work with Your Budget
The best way to teach kids to start managing money is to give them some. If they blow their allowance on a new Star Wars figure and don’t have enough left for a DVD they really want, that’s actually a good thing: “They learn firsthand the consequence of overspending,” says Pearl.
Money Lesson: Good Things Come to Those Who Wait
Teaching kids delayed gratification will help combat the “buy now, pay later” mentality that could mire them in credit card debt later on. So, as much as you can, reinforce the idea that waiting pays off. For instance, make a homemade pizza together with all the ingredients your child loves; then microwave a store-bought frozen one. The homemade pie takes longer, but it tastes way better.
Money Lesson: Don’t Spend It as Soon as You Get It
Curbing impulse buying goes hand in hand with teaching delayed gratification. Show by example. Before you go shopping, create a budget. Outline what you’re going to buy, what stores you’re going to, and the price range for each item. Then compare prices online and clip coupons together (consider letting your child keep the savings so she sees that bargain-hunting pays). She’ll learn that planning purchases before you buy is the routine.
Money Lesson: Saving Is Cool
Your daughter wants a new doll that she doesn’t have enough money for? Tell her to save up! Once has enough, take her shopping and let her pay the cashier herself. She’ll never forget how good it feels to work toward a goal and be rewarded in the end.
Money Lesson: Keep Track
Simply knowing where her money is going is a big step forward in your child’s money management skills. Have her use a notebook or go on a computer to keep track of her money. Make a file (or use an old purse) where she can store receipts and statements.
Money Lesson: Have a Wish List
It’s hard for kids to set priorities, so sit down together and make a wish list of the things your child wants to do with her money. Then help her rank the list by discussing what’s important about each wish.
Money Lesson: Make the Most of Savings
Introduce your child to savings vehicles that could earn her interest, such as savings bonds and certificates of deposit. Search for a compound interest calculator online and show her how just $1 can grow with interest over time (and check out ThreeJars’s Allowance Calculator, which shows the allowance you got as a kid in today’s dollars). She’ll be amazed!
Money Lesson: Be a Little Skeptical
While you don’t want your children to think companies are out to get them, every now and then point out manufacturers’ sales tricks. “Healthy skepticism is crucial not only so kids can resist the allure of products on TV, but also because it helps keep them from buying into the messages behind the ads — like if you have the right clothes and toys, you’ll be popular,” says Pearl.
Money Lesson 10: Share
Have your kids donate a portion of their allowance to charity. It teaches them that money can be used to help people, rather than just for buying things. Remind them that it’s not how much you give — every little bit counts.