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Teaching Children About Money

Updated on February 8, 2017
Robie Benve profile image

Robie is a writer interested in frugal living and ways to acquire financial strength. She got her MBA from the University of Venice, Italy.

Answers to money questions that your child wants to know – even if he/she never asked…

Where does money come from?

How do banks work?

Why is saving important?

Why is budgeting important?

Kids... They Are Watching Us

There is never a moment when we are not role models for our children.
This applies to every aspect of life, including money management. Our attitude towards money, how we handle it, and the way we spend it, are “speaking” to our children about money and the role it has in our life.

Children are like sponges, they assimilate so much information from us even when we are not aware of it.

Our body language, phone conversations, comments and outbursts all leave some kind of impression on our children.

Free your kids from a life of financial stress
Free your kids from a life of financial stress | Source

1. Where Does Money Come From?

It's not so simple for children to understand that money is a limited and hard-to-get resource. Here are some ideas on how to explain where money may come from.

  • The typical source of money is a paycheck, which means that you need to have a job and work before you can get paid.
  • A wonderful source of money, because you don't have to make much effort at all are gifts and inheritances. This is money that people give you because they love you, or at least really like you, like your grandparents.
  • Depending on the family, children may get allowances as a weekly spending fund, or as remuneration for the chores they do. Allowances are the first paycheck in a child's life, and a great opportunity to learn about different ways to use money.
  • Many people find second jobs to make some extra money, and young people do extra chores for family and neighbors and get paid for them, like washing cars, mowing lawns, and painting fences.
  • A good way to make money is to sell things, which can help with de-clattering at the same time. There are all kind of things that can be sold - at a yard sale, online, or any other creative way - used things you don't need any more, things you made, and even your crafts or artwork.
  • Some people get money from investments. Not all investments are able to make your money grow, when you get money from investments, it's called returns or interests. However, there is always a certain degree of risk connected with your investments, especially those with potential high returns.
  • Investment risk means that if your money may grow, but there is the possibility your investment loses value and you end up with less money. Some investments are low or no risk, these usually offer the lowest returns.

Things You Can do With Money

SAVE = Put money aside for future use.

SPEND = Buy things that you need or want now.

INVEST = Use your money to make more money.

SHARE = Help others and give to charities.

Start Saving Early

A budget can help save enough money for the things we want to buy.  - Photo: three different piggy banks.
A budget can help save enough money for the things we want to buy. - Photo: three different piggy banks. | Source

2. How Do Banks Work?

A bank is a business that needs to make money to pay its employees and make a profit.

When you put your money in a bank account, the money does not sit there waiting for when you need it back.

You, as the depositing customer, may gain a small amount of money in return, as interest on your savings.

The bank puts your money to work by lending it to other people for a higher interest rate. When other people need money to make a big purchase, they may ask the bank for a loan or a mortgage. The bank lets them use your money and charges them an interest, which makes the bank profit.

No worries though, when you need your money back you'll have it. The bank always keeps a cash fund available.

Talk To Your Children About How You Manage Your Money
Talk To Your Children About How You Manage Your Money | Source

3. Why Is It Important To Save?

Saving money is not easy, but it is well worth it.

Saving money means not spending all the money you have available, but keep some for the future.

The main purposes of saving are: A. being able to take care of emergencies, and B. take advantage of opportunities when they arise.

Examples

A. Using savings to take care of emergencies. An emergency is an unpredictable event that causes an expense, and usually requires to be solved as soon as possible.

You spent all your allowance on candies and new games. Let's pretend that your phone falls and stops working, and since it was your fault, your parent make you pay to fix it. You need $50 to fix it but you have no savings. You'll have to start saving your allowance until you have enough money. In the meantime... no phone.

B. Using savings to enjoy an opportunity.

An opportunity is an unexpected offer that is too good to give up.

A friend may ask you to go to your favorite entertainment park, but you have already spent all your money and can't afford the ticket. You have to say no, missing out on the opportunity - unless you borrow from him, and that would put you in debt.

Being in debt means that you have already spent money that you didn't have yet, and when that money comes along it's not yours anymore. You'll have to pay back the debt, leaving you with less cash available in the future.

The Power of Starting Saving Early

Age When Kid Starts Saving
Amount saved monthly
Total saved at 18yrs (no interest)
7 years-old
$3
$396
 
$5
$660
 
$10
$1,320
15 years-old
$3
$108
 
$5
$180
 
$10
$360

If you are saving for a specific item, such as a new computer or a puppy, put a picture of what you want in plain sight, and label your piggy banks. Every time you see it you’ll be reminded of your goal.

Saving for a specific goal keeps you focused.
Saving for a specific goal keeps you focused. | Source

4. Why Is A Budget Important?

We all have things we want. Parents may want a new car; children may want a new bike, or new games.

A budget can help save enough money for the things we want to buy.

A budget is a tool for you to know how much money you get (income) and spend (expenses) each month, and helps you figure out how much you have left over each month, and how much you still need to save to reach your goals.

Families need to make sure they have enough money for regular bills - groceries, electricity, water, etc.

They also need to take care of emergencies and unexpected expenses, like a flat tire, a birthday invitation, a sick pet.

To figure out how to best use their money, most families do a budget, listing all money earned and money spent.

Children can do their own budget too, look at what they are currently spending and decide what they can cut, or if they need to do some extra chores to meet their goal.

Talk To Your Children About How You Manage Your Money

Teaching the value of money by example is a great way to go, but explaining why we handle it one way instead of another can make the message much more powerful.

Every time your child is bugging you to buy candies, toys, ice creams, and what not, is a great opportunity to enrich the “No” answer with a brief explanation of “why not”, besides the obvious because I said so.

You don’t need to be a financial expert, actually it’s better if you keep it simple, it will sound even more like an everyday essential knowledge.

Explain why you buy a certain item instead of a more expensive one, what would make you decide to go for the costlier, how you will be able to afford something in the future that you can’t buy now.

© 2012 Robie Benve

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    • Jason mackenzie profile image

      Jason Mackenzie 3 months ago from Perth WA 6000

      I think whatever has been discussed in this hub is really important. To a great extent it shapes up the future of the child because being able to manage finances is half the battle.

    • Robie Benve profile image
      Author

      Robie Benve 4 years ago from Ohio

      Marcy, I like how you describe teaching children about money "an art". It surely is a balancing act trying to teach about saving and being frugal in our society full of consumerist contradictions.

      I appreciate you reading and commenting. :)

    • Marcy Goodfleisch profile image

      Marcy Goodfleisch 4 years ago from Planet Earth

      We have really lost the art of teaching our children to save money - it seems everyone wants their rewards before they pay the price. These are terrific points and tips - thanks!

      Voted up!!

    • Robie Benve profile image
      Author

      Robie Benve 4 years ago from Ohio

      Glimmer, that sounds like my daughter (she's seven) if I say I don't have the money for something, she goes "but you have your credit card, just use that", like it's just a virtual buying tool. lol I love her intent expression when I explain the connection between working, checkbook, bank account, and credit card. Hopefully one day she'll get it completely and stop asking to buy everything she sees.

      I appreciate you reading and taking the time to comment. :)

    • Robie Benve profile image
      Author

      Robie Benve 4 years ago from Ohio

      Michael, your experience reminds me so much of the three years that I did financial counseling for the Army. So many young (and sometimes not-so-young) soldiers getting in financial hard waters, often because they didn't know any better. That is exactly what prompts me to write these articles. Thanks a lot for your feedback and nice words. :)

    • Glimmer Twin Fan profile image

      Glimmer Twin Fan 4 years ago

      Useful hub! We are always trying to teach our daughter about money and budgeting. She seems to think we have unending funds for anything and then gets quite disappointed when we don't.

    • Robie Benve profile image
      Author

      Robie Benve 4 years ago from Ohio

      Hi coffeegginmyrice, your comment made me smile! How true that our role as moms never ends! My mom does not see me for months in a row, and when I'm visiting she's all like "be careful in the traffic", "make sure your lights are on", "don't get back too late", etc. I'm sure your girls deep down appreciate your care and concern, even if in surface I can just see them rolling their eyes. ;)

    • coffeegginmyrice profile image

      Marites Mabugat-Simbajon 4 years ago from Toronto, Ontario

      My girls are 22 and 16 and they are big enough to know how to save, but still as a parent, I need to follow up and check often with their paychecks and make sure some savings are put aside. For sure, that makes me again as an annoying mom to them, but "what the heck children, this is mommy's role." :)

    • Michael Tully profile image

      Michael Tully 4 years ago

      Thanks for a very timely and relevant article. Sadly, it was my experience over many years of public accounting practice that few people discuss money management with their kids. As a consequence, we have young people graduating from high school with no idea how to balance a checkbook, let alone manage their finances.

      You've shown your readers how to discuss money issues with their children in language they can easily understand. Here's hoping that they take the ball and run with it.

    • Robie Benve profile image
      Author

      Robie Benve 4 years ago from Ohio

      Nettlemere, saving with a goal in mind can be a great help to reach that goal, and as you said it's a good habit to learn young. Thanks a lot for reading and commenting. :)

    • Nettlemere profile image

      Nettlemere 4 years ago from Burnley, Lancashire, UK

      I like the idea of labeling the piggy bank with what they are saving up for. Definitely a good habit to learn young.

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