Be your child’s money role model and start teaching them about spending, saving, and giving money. While some might think discussing this topic is taboo, your kids need to learn money habits from someone, so why not make it you?
Where Should I Start?
We live in a digital age where most people spend money by swiping a card. As adults, we understand this concept of knowing how much is in our accounts and how much we can spend. As children, it appears that there is an endless supply of money. Eric Gatz, Retail Banking Manager at Coulee Bank says, “When introducing your kids to money, they must see it. Kids are very visual. Let them play with money to see money earned and when it’s dwindling.” A good time to start this process is with children ages 3-7.
One way of showing your kids this concept is to use three mason jars or envelopes. One jar is for spending, one for saving, and one for giving. Gatz says kids need to understand that money should be split into groups. Each group has a different purpose. Money should be added to each group when you get an allowance or commission for finishing age-appropriate chores like picking up toys, checking the mail, helping put groceries away, and feeding pets.
Teaching the concept of splitting money into groups helps illustrate how money comes in and goes out. Gatz gives the example, if your child wants to purchase a $100 item, they need to put money into the savings jar or envelope. If your child wants to buy a candy bar or small treat, they can use the spending jar to purchase the treat. The giving jar teaches gratitude. “It’s a blessing to receive the money earned and important to give back to your church, charitable organization, or friend in need,” says Gatz.
He goes on to say that at a younger age, the child may not have as much money to put into each jar, so you can take the money out of the giving jar as infrequently as needed. Just make sure the child puts money in the giving jar often, and then uses the money for giving. Once the child is older, they have learned the concept of giving and can start giving more money more often. For example, Gatz gives a tithe to his church each month. He recommends giving 10% of your income.
How Should I Pay My Children?
There are two concepts for the commission-based mindset. Gatz says that as members of the family, he asks his children to participate in maintaining the household. The children clear the dishes off the kitchen table and help wash them. They also keep their room clean. These chores don’t necessarily equate to earning money. The second concept is chores assigned to help them earn money. These include mowing the lawn, raking leaves, pulling weeds, vacuuming, mopping, and helping mom or dad with projects they are working on. These projects are a great way for a child to earn money.
Gatz shares the Dave Ramsey mindset when it comes to paying his children. He says he likes to use the word “commission” instead of “allowance.” Allowance can make children feel entitled to money whether they do the work or not. The commission system sets the standard, if you do the work, you earn the money. Gatz says you need to be careful when it comes to commissions. “Some children may take advantage of commission-based projects. The child may ask, ‘I cleaned this now can I have a dollar?’” He says conversations must be had ahead of time to let the child know that you don’t always get money for doing something.
That conversation may look like this: If you do these chores once a week you can earn a maximum of $20 or an amount your household can afford. Then discuss how long it takes to save the money to purchase the desired item. Teaching them how to save also helps them understand just because you want it, doesn’t mean you need it immediately. Plus, it gives a child perspective on how long it takes to save and afford the desired item. He says, “In the end, some kids may realize they don’t really want it anymore because they worked so hard to save for the item. They may want something else instead or choose to keep saving.”
Discussing Finances with Your Teenager
Talking with a teenager becomes more complex and varies between households. This is the perfect time to begin discussing budgets, credit, cash, and spending. At this age, some parents want their children to have a smartphone. “A good way to start teaching financial responsibility is to have your child have some skin in the game,” says Gatz. Adding a phone line to the account may cost the parent $50 a month. It’s a great lesson to make the child pay for part of that monthly charge. Or maybe your child wants to attend a school sporting event. As a parent, you can offer to pay their admission fee and make the teenager pay for any items at the concession stand.
It’s also the perfect time to start discussing a car for when they turn 16. Tell your child they need to save a certain dollar amount for the car, and you can match that. Of course, there is gas, car insurance, and car repairs that the child may need to continue saving for or get a part-time job outside the home.
When your child reaches the age of 16-18, now is the time to discuss living within your means. Teach them about credit, borrowing money, and paying it back. This skill is important for building credit so the teenager can eventually get a home loan. You also want to ensure they aren’t getting into financial trouble with a credit card.
You may also want to talk in-depth about saving. From a young age, hopefully, you started teaching your child about money, and now, you can discuss saving for emergencies and retirement. Building an emergency fund is essential. Sometimes unexpected car expenses, medical expenses, or even a job loss could occur. For more information about building an emergency fund click here.
At each stage, there are many important lessons to learn about money. It takes time and effort to help your children manage money responsibly. Remember, the good habits they form today could help benefit them throughout their life.