Money Management for Children

 Studies have shown that money matters, like most other forms of learning, are picked up by children at a young age. Habits formed during childhood may have a bearing on how children behave in regards to financial matters as adults.

This does not mean lecturing kids on macroeconomics at a young age. It is not about numbers or theory, rather the development of sensible spending practices and an appreciation of the value of saving.

If you wait until a teenager is ready to leave home to start thinking about financial education it is too late. As soon as a child can count they can begin to understand the concept of money. An easy first lesson is to explain the relationship between Mommy and / or Daddy working and the money that comes out of the machine at the bank. Appreciating that money is not a limitless resource is an important step in educating your child.

Once a child understands the concept of choice, further aspects can be introduced. Opportunity Cost is what Economists refer to as the price paid for choosing one option over another. Deciding between all the strawberries you can eat or one small chocolate bar introduces a child to the sacrifices made by saving over spending.

These points seem insignificant but are all small steps in the learning process that's ultimate goal is a sound financial basis for a young adult.

After the value of money is recognized, the next step is the formation of goals.

To achieve this, the early introduction of an Allowance is essential. Giving children their own money not only empowers them but forces them to make the decision on what it is spent on. It is normal for children to spend like mad when first given money, this can be changed with the setting of goals. Once an allowance is provided, it is wise to discuss the options with children. Explaining that if they don't spend their money for 4 weeks they can afford the toy they want is often an eye opening moment.

One common barrier parents find is that children do not possess the patience or will power to avoid the short term sweets for the long term toy. This presents an opportunity to introduce the concept of interest.

"If you save up 4 weeks of allowance to buy that Barbie, I will add a whole extra dollar for free!"

Rewarding saving at a young age is a powerful tool (but I am afraid you will have to pay a high rate for them to notice) and one of the best things you can do at this stage. Merely introducing the idea of saving should be considered a victory.

Once simple goals have been set and met, it is time to look to a longer time frame. Choose a more expensive item that requires a longer commitment. At this point you can show how not all of the money needs to be saved. Spending some and saving some is the basis of a budget - this is a valuable life skill at can be demonstrated in its most basic form at a young age.

While these skills are being developed it is important to make your child aware that you are making similar choices in your life. Talk about the holiday you are saving for, the new car you would like but cannot afford due to other commitments.

As children get older it is reasonable to add conditions to their Allowance. By making money dependent on chores you start to build a work ethic and reinforce the notion that money does not grow on trees. Like all aspects of this strategy, the conditions become more advanced as age progresses

Just the fact that a parent cares about the financial education of their children gives them a great advantage over the average child. Being aware of the simple steps you can take to increase awareness of financial matters builds on that advantage. 

Don't discount the simple lessons that help create a useful financial education in children.