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Teaching Money: Economics for Kids
Your kids will surely learn about money, whether or not you decide to teach them. Teaching kids about money is important if you hope to develop good financial habits and an understanding of how the world works financially. Economics for kids is about more than teaching money skills like budgeting and using a savings account. This article provides several practical ideas for instilling in them the right attitude towards money as well as the skills for handling money realistically and responsibly.
Allowance and the Message it Sends
Before going any further, it is important to discuss how your kids get money. If you plan on teaching your kids about money, it is important to construct an experience that is consistent with the way the world works. If you buy the things your children want with your own money, they quickly learn that the way to get money is to beg for it. As soon as practical it is better to give them an allowance, and save gifting for holidays and other special occasions.
An allowance alone is not enough; it really needs to be tied to some sort of expectations -- either to chores completed, or to maintaining good behavior and/or grades. In these ways, children can learn that their efforts matter and have real consequences. If you give an allowance and they get the money regardless of whether they make any effort, then you are setting them up to expect welfare, parental largess, or an inheritance to live on. Don't set your kid up to be on the dole when he is dealing with money an adult.
Until recent years, experts used to recommend an allowance that was equal to the child's age, and increasing the kids money a dollar every year at a birthday. That is not much money in today's dollars, but if your budget is tight it might still work for you. In today's dollars, it might make more sense to give $2 a year or some similar predictable formula. Ideally the "payday" would be on a Friday.
Money Doesn't Grow On Trees
Economics for kids, without any information to the contrary, is very simple from their point of view: money grows on trees. At some point by their early to mid teens, you will want to teach your children a more realistic view. Go over the basic outlines of your own family budget with them, and help them understand how you decide what you do and do not spend your money on.
Long before that talk, you need to have taught them the fundamental principles about saving, work, borrowing, and budgeting. Help them understand compound interest, and the rule of 72 and other topics that could and should be taught as part of an economics for kids curriculum either at school or at home.
The following practices can help you with teaching money for kids in a practical way:
Teaching Kids Money Saving Techniques
If you have a regular allowance in place, or your child has a job, then it is time to begin with teaching them how to manage and save money. There are many good ways to do this, including opening savings accounts for children, which will be discussed later. However, if your child has a steady source of income- their allowance or a job, then the three jars technique is a good starting point.
Have your child select the kind of jars that will be used, and playfully decorate them. One jar is for spending money, to be spent right away. Another jar is designated for short term savings, money that will be used to buy something in a few weeks, after enough money has built up, sufficient to buy that pair of sneakers or that new game they want so badly. The third jar is for long term savings. The money your child puts in that can only be spent on something that costs at least $100
Now sit down with them and work out how much will go into each jar. It can be there decision but you need to bend their ear to guide them to some sensible choices. Lets say you are giving your 12 year old son a $12 allowance each week. He may decide to put $2 into the now jar (or whatever you call it) $8 into the short term savings jar- maybe you will call it the "soon" jar and another $2 into the long term savings jar. At that rate, he would earn enough for a game in 3-5 weeks, and the $100 threshold would not come up for almost a year. Some parents like to add a 4th jar for a charity or a tithe amount, if that is a shared family value you would like to instill.
If your son gets a job mowing lawns, and brings he home $20 one week. He can divide it roughly the same way, maybe $4 for the now fund, $4 for long term savings, and $12 towards the sneakers or new NBA video game. Some parents, in order to encourage the savings, will put a dollar into the long term fund for every dollar saved, kind of like good employers who match your 401K contribution.
Savings Accounts for Children
For children who have mastered the three jar task or a comparable visually rich method of encouraging savings, the next step is to take the long term savings to the bank, and turn it into a savings account. Savings accounts for children can demystify the banking process and are especially useful when the discipline of a method like the three jar approach has been successfully implemented. The same rules should apply: withdrawals are only done once a year at most, and for an item costing at least $100.
When done right, the interaction between kids and money can be fun for parents to watch, as you see the delight in their eyes when they see the bank adding interest to their account each month. Of course savings accounts for children can be a great opportunity to discuss weightier concepts with the more mature children like compound interest or APR. A`word of caution. If you are going to let them take money out of savings whenever the need becomes compelling, its better not to have them start in the first place. The whole doing of a bank savings accounts for children, is to teach them good savings habits, not destructive ones!
Two fun ways to teach kids about investing is by gifting single shares of stocks like Disney and McDonald's, and by having a family competition. Most kids really enjoy getting a single share of a stock in a company they already like, and these are easy to purchase, as a gift, although the fees are a little higher than buying them in more standard lots. The stick certificate can be hung on their wall or kept in a favorite hiding place.
Even more fun and no real cost is to have a family competition. Everybody buys 100 shares of one stock, at the start of the race, and 6 months later, the "winner" is the one who made the most profit including of course the dividends. At least one of the parents should buy a bond or utility stock, as an example of a "safer" investment. Get the dog involved as well, naturally buying of course some stock in Purina or whatever they fancy.
Economics for Kids
Teaching kids about money can be fun. The methods discussed here are just a few of the easy techniques to use in teaching money and savings ideas to kids, and money can be a great door opener to conversations about other important financial concepts like loans, work, credit, and budgets. There are also a number of money games for kids, that can be helpful in teaching money and finance. There is an online crash course in savings at pbskids or for the competitive child who loves sports, play financial football at practicalmoneyskills.com, where you move the ball down the field by answering questions about finances, economics for kids, and money.